$EURGBP breaks to new lows to open the new trading week as fully anticipated by many in Thursday’s digest. Sterling also maintained bullish momentum versus the commodity dollars as $GBPAUD, $GBPNZD, and $GBPCAD continued to rally higher in Monday trading. $GBPUSD was the odd man as it trades in a narrow range struggling with both a strong USD and strong GBP. If USD strength remains, look for cable to correct lower to 1.60 before rallying again to new highs.
Sterling has staged a breakout across the board this week as its underlying fundamental landscape has turned hawkish. Early Friday trading saw GBP break to new 2012 highs versus the AUD, CAD, USD, and NZD. Its been a tremendous week. So it is no wonder that many traders are looking to get short sterling into next week. Whether this is a good idea or not depends on your timeframe. Just remember though, the trend is your friend.
Sterling comes alive this week after core UK CPI ticked higher-than-expected yesterday and a known BoE dove turns hawkish today. While economic data is important and moves the currency, the 2 most important fundamental pieces to watch concerning sterling are inflation and the Bank of England’s reaction to it. This week, both turned hawkish. If this becomes a trend, we could see sterling strength remain with a $GBPUSD that is above 1.60 and a $EURGBP at 0.80.
Sterling manages to stage a decent correction in today’s trading session. Yet, it is the AUD taking it on the chin today as it suffers from a double whammy of commodities weakness and USD strength. It was the only currency pair that sterling rallied higher against without much pullback. The timing with now confirmed Chinese softness (causing the commodities weakness) gives the $GBPAUD legs to run higher.
Sterling refuses to weaken even as economic data slips and members of the BoE still look to add more QE. The $GBPUSD continues to make higher highs at 1.5999 though still remains capped by the major 1.60 level. Even the almighty commodity dollars (AUD, NZD, and CAD) are weak against the GBP. Are we seeing the beginnings of a bear trend reversal in sterling?
A big day in UK politics with release of Bank of England minutes and the announcement of the country’s budget produced incredible moves in sterling today.
No real surprises from the $FED or the BoJ yesterday as both left interest rates unchanged. With equities higher still after the FOMC statement, it is hard to see risk currencies fall more from here. While the USD seems to be trading on fundamentals (rising on good US news after both US NFP and somewhat hawkish Fed statement), it remains to be seen if that is a new shift in the market or if risk still rules investor sentiment.
An ironic find on Flickr: the World Money Expo. In China
This week rounds out the major central bank announcements for the month of March. Three central banks are on tap to release decisions on monetary policy: the Bank of Japan, the Federal Reserve, and the Swiss National Bank. Of course, the Fed is the highlight. But with the Fed in the news so much last week, one has to wonder what more the Fed can give the markets.
Very muted price action this trading session leaves sterling still weak after yesterday’s pullbacks. The market has entered its wait-and-see mode as we await the RBNZ later tonight and BoE, ECB, and BoC on Thursday morning. As boring as today may be, it gets just as interesting in the next 24 hours.
During the last days of February last week, sterling strengthened across the board. I noticed it because it was very strange to see the $GBPUSD and the $GBPAUD rise together when these GBP pairs usually diverge. $GBPUSD and $AUDUSD typically rise together on risk and a weak USD resulting in a weak $GBPAUD. Looking at the rest of the GBP pairs, sterling was being bought versus all the major currencies. As companies and investors alike exit positions and/or repatriate profits, capital flows can be even more exaggerated at the end of the month. And it seems investors are positioning with sterling.
But why would sterling go up when the United Kingdom is the only G10 country to fall into recession at the end of last year. The BoE has launched QE3 for the UK. Inflation is quite high even if the central bank chooses to ignore it until it comes back down to acceptable levels. An interesting monetary policy angle that is but that’s for another musing.
So why would sterling go up? Because of China? In yesterday’s digest, a very interesting article suggested that sterling is catching bid as a preferred funding currency to unwind long AUD positions. With China’s economy slowing down, analysts believe that Australia’s economy will suffer due to the declining demand from their large trading partner. A slowdown in the economy the main reason why the Reserve Bank of Australia is signaling a more dovish monetary policy. WSJ‘s Kemble-Diaz argues that the undervalued GBP has more value than other major currencies at such low levels.
Another reason may be seasonality.
March was a good time of year last year
In $GBPUSD this time last year, March 2011 marked the beginning of a push higher after the rally in January 2011. Cable is certainly well-posied for consolidation after its monster rally higher earlier this year. Another push higher is supported technically as long as price remains above 1.55.
Since seasonality is the buzzword on the financial circuit so far this year, let’s take it a little further. The end of the month into the beginning of the next tends to be a good time for cable. The $GBPUSD has rallied higher in the last months during this time period.
The end/beginning of the month is a good time for cable
No matter how you reason it, sterling continues to confound the bears with its strength. Against the USD, maybe $GBPUSD becomes an easy buy. But when supported with a rise in $GBPCAD, $GBPAUD, and $GBPNZD, one need only concentrates on riding this new trend while the opportunity is here and getting off where appropriate. Trade what you see.
