The British pound has gained a modest 3.5% since early June when I removed my long-standing bearishness on the currency. The momentum in the pound accelerated somewhat after last Wednesday’s release of the Bank of England’s minutes showed Andrew Sentance dissented from the rest of his fellow central bankers by calling for a rate hike. Add in BoE Monetary Policy Committee Member Adam Posen’s interview with CNBC where he openly fretted about persistently high inflation numbers and suddenly a rate hike in the UK seems like a real possibility sooner than later.
For now, I remain skeptical of an imminent rate hike given the extended dovish posture of the BoE and the continued policy of quantitative easing. However, the U.S. Federal Reserve now looks more dovish in comparison, and the U.K. government looks like it will get serious about tackling its budget deficits well ahead of the U.S. For these reasons alone, I am sticking to my “non-bearish” stance.
From a technical standpoint, the pound’s slow and choppy momentum now faces several challenges against the U.S. dollar. The chart below shows that the pound has broken through the 50-day moving average (DMA) twice before only to fall back into a multi-month downtrend. April’s peak also looms large; meeting that challenge will likely occur at the same time the pound meets its declining 200DMA for the first time from underneath during this downtrend. I expect each challenge to cause setbacks but also provide ample buying opportunities to play eventual additional upside. Of course, nimble traders may make hay from playing short against these technical resistance levels. As always, macro-level news may provide key caveats. If inflationary pressures continue to mount while the BoE idles, I will also have to revisit my position. (Click chart for a larger view).
Source: dailyfx.com charts. (Click for a larger view)
The pound should fare better than its soccer-equivalents on the pitch of this year’s World Cup. Yes, the English were robbed of a goal against Germany, but would it have mattered on the way to elimination?
Be careful out there!
Full disclosure: long GBP/USD