The British pound continues its steady ascent from 14-month lows versus the U.S. dollar. This feat is not as remarkable as it could have been given the dollar’s steady descent against all major currencies since June. However, both fundamental and technical developments continue to favor even higher levels.
Three weeks after dropping my bearish bias on the pound in early June, I flagged potential short-term resistance to further gains. The first line of resistance was the downtrend. As expected, the pound struggled upon hitting this line. It took a hot inflation report to finally push the pound over the hump after nine days of churning and fading from this line. The convergence of the 200-day moving average (DMA) with the levels from April highs should provide even more stiff resistance. Click the chart below for a detailed description of the current technical set-up.
Source: dailyfx.com charts – click for larger view
The latest U.K. inflation report printed marginally higher rates than expected. However, given the relatively low inflation (even disinflation) experienced by the U.S. and many, if not most, countries in the eurozone, the persistently high inflation numbers are starting to unsettle monetary nerves in the U.K.
No one wants to raise rates during an extremely fragile recovery. Raising rates also wins no friends since no one wants to pay more to borrow money. Moreover, the Bank of England (especially Governor Mervyn King) has been dovish so long, it is possible the “raise rates” button is lost amongst the rubbish in the BoE’s attic. Technically, the BoE remains in a period of quantitative easing at the same time the British government gets ready to aggressively attack its budget deficit. This all makes for a contentious period of hand-wringing. Indeed, Andrew Sentance is adding to the heat with his extremely vocal dissent to the BoE’s continued dovish stance.
In the meantime, currency traders are left to tentatively and wildly guess at a timeframe for the first rate hike. This process should keep the pound floating higher as long as the U.S. Federal Reserve frets about slowing growth in the U.S. The UK’s looming problem with inflation at a time of sluggish economic performance should warrant a note of caution to anyone who thinks that the U.S. is absolutely certain to descend into a deflationary spiral any minute now.
Be careful out there!
Full disclosure: no positions
Dr. Duru,
I follow your blog and think the analysis is insightful and better than many on the street. Please keep up the good work.
By the way, I think Trader Mike’s site is down. Perhaps I am wrong – maybe you could check. But for a few days now I get an error message when I click his link. If you get same and have a way of contacting him, it would be a good deed if you could let him know… Many thanks.
Richard
Thanks for the note. Yeah, Mike’s site is down. He just hasn’t gotten around to dealing with it.