In the middle of this Bull US Dollar environment since the Fed announced its Taper last month, the British pound still gets support from traders and investors and remains a good hedge against their USD long positions. As you can see it on the graph below, after it hit its support at 1.6320 (mid-Dec 2013 levels) last week, Friday strong retail sales (+2.6% MoM in December vs +0.4% cons.) and this morning good employment figures (jobless rate went down 0.3% to 7.1% in December, vs analysts’ expectations of a 7.3% print) pushed the pair higher and Cable is trading at 1.6576 at the time we are writing this article.
We added the US-UK 2-year yield spread (white line) in the chart, an indicator that we have been watching since the new BoE Governor introduced the forward guidance last August. We saw this morning that the unemployment rate decreased faster than expected and is approaching the 7-percent threshold presented by the Bank of England (a threshold for considering an interest rate rise). Traders are starting to speculate that the BoE will increase its Official Bank rate (currently at a historical low of 0.5%) in the middle of the year 2015 (vs. August 2016 target the Bank said last August). You can see that the 2-year spread has been increasing again these last few days (from 5bps to 9bps), sending Cable higher by 250 pips.
The publication of the latest BoE minutes this morning didn’t bring any comment on the possible interest rate rise next year, however traders are now watching closely the central bank’s updates on forward guidance as any revision could bring pressure back on the British pound. A potential action from UK policymakers would be to decrease the threshold to 6.5% (like in the US) if the employment keeps improving at a fast pace.
The next resistance on GBPUSD stands at 1.6600 (level reached the last day of last year) and the pair can find some difficulties to break that level. Cable is up 16.5% since its low of 1.4812 (hit on July 9, 2013) and has been trading within the 1.6300 – 1.6600 range for the past month. We think that we will have to see stronger fundamentals in the coming weeks to see GBPUSD at higher levels (1.6700 – 1.6800), otherwise the pair will start to lose a bit of strength against the greenback after the sharp increase and go back to lower levels (1.6400 at first).