Great Graphic: When Sterling Becomes the Pound

Sterling has fallen out of favor.  It was the market's darling, rallying from $1.4565 in mid-April to $1.5815 in mid-May.  From a technical point of view it was correcting the slide from last July's test on $1.7200.  The fundamental trigger for the correction was the weaker US dollar environment, which was partly spurred by disappointing Q1 data.  The unexpected majority victory by the Tories also helped fuel sterling gains.

That upside correction faltered as it approached the 50% retracement objective (~$1.5880).  The fundamentals considerations behind sterling's loss of favor has been the stronger US data, signals from the Fed's leadership that a rate hike this year is still very much in the cards, weaker UK data, including the CPI slipping into negative territory. 

Sterling's appreciation was tantamount to a rate hike.  From the start of the year through last week, the BOE's broad trade-weighted index for sterling appreciated by 6.6%.  Using a rough-and-ready rule of thumb, this was the equivalent of the BOE raising rates by around 1%-1.5%.  Of course, the adjustable mortgages which are commonplace in the UK were not impacted as they would have been by higher rates.  

Still, sterling's appreciation weakens the external sector, which shaved 0.9% off UK Q1 GDP.  At 0.3% Q1 UK growth has half of that recorded in Q4 14.    The BOE expects the economy to expand by 2.5% this year, but that was at least partly a function of anticipating that Q1 growth would be revised up to 0.5% (it claimed in its February inflation report).   It had expected Q2 growth to be 0.7%, but the recent data suggests this is too optimistic. The market is pushing out the first BOE rate hike into H2 2016. 

Today is the fifth consecutive session sterling has fallen.  This Great Graphic, from Bloomberg, shows sterling is approaching the 50% retracement of its month long bounce.  That retracement objective comes in just below $1.5200.  The pre-election dip saw sterling toward $1.5090.  The 61.8% retracement comes in near $1.5045.  

The technical indicators have deteriorated.  The MACDs crossed lower last week and the RSI has been drifting lower.  The five-day moving average is crossing below the 20-day average today for the first time since mid-April. 

The speculative shorts in the futures market peaked in mid-March near 85k contracts and have fell to about 59.4k in early May.  The speculative longs set 18-month lows in late-April (ahead of the election).  They peaked last July near 100k and had fallen to 33k.  They stood at 41k contacts on May 19.  Tomorrow the CFTC will provide updated positioning figures through May 26.  We anticipate long were cut and shorts were grown.

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Great Graphic: When Sterling Becomes the Pound Great Graphic:  When Sterling Becomes the Pound Reviewed by Marc Chandler on May 28, 2015 Rating: 5
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