British Pound May Have Set 2013 Peak – Two Key Themes to Watch
Fundamental Forecast for the British Pound: Bearish
- British Pound sets fresh year-to-date high versus downtrodden US Dollar
- Price seems overextended, and indeed we are looking at levels at which we might sell GBPUSD
- Coming week could bring volatility on the Bank of England and the ongoing US Government shutdown
The British Pound surged to fresh year-to-date highs only to finish lower versus the US Dollar, suggesting that the previously high-flying Sterling may have set an important top through recent trading.
Earlier in the week we had argued that the GBPUSD was clearly overextended and yet it was difficult to sell into strength. The sharp late-week reversal suggests that this may in fact be the British Pound reversal we’ve been watching for, and indeed our Senior Technical Strategist highlights levels at which we might want to sell GBP.
A potentially significant Bank of England policy meeting may nonetheless spark some event-driven moves, and it will be important to watch for any surprises from the increasingly-hawkish central bank.
BoE Governor Mark Carney sent the GBP sharply higher as he told a domestic newspaper that he does not see the case for further Quantitative Easing (QE). In other words: don’t expect a hike in the Bank of England’s Asset Purchase Target through the foreseeable future.
To that end we’ll watch for surprises out of upcoming Industrial Production numbers for August and the NIESR GDP growth estimates for September. It might take a substantial surprise out of either to force a shift in expectations ahead of the Bank of England’s October 10 meeting.
Economists widely predict the Bank of England will leave rates and policy unchanged this week, and the BoE does not often release official commentary following meetings at which policy remained unchanged. Governor Carney could nonetheless take the opportunity to further clarify the bank’s stance on inflation and bank policy.
Risks to the British Pound are arguably weighted to the downside ahead of the BoE; relatively hawkish official rhetoric has lifted domestic interest rate expectations and the GBP itself.
It could be a fairly significant week for the British Pound, and we can’t ignore risks of further political turmoil in the US as a major driver of GBPUSD volatility. We recently argued that the US government shutdown was a reason to sell the US Dollar, but any news of a deal between the legislature and the President could just as easily force an important Greenback bounce against major counterparts. - DR
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