GBP showing some ‘fatigue’

After one year of shine, it feels that the British pound has entered into a bearish momentum. The currency, which used to be the market’s darling, is now down 2.20% against the greenback since its high on July 15 (1.7191 according to Reuters).
With the Fed ‘waking up’ (at least US policymakers more confident than in H1 this year) and strong macro US fundamentals (GDP Q2 first estimates at 4.0%, ISM Mfg PMI at 58.2 and six consecutive months of NFP prints above the 200-level), the US Dollar has remained traders’ favourite currency to hold over the past three weeks. While LT US yields struggle to rise in this high-pressure geopolitical environment, with the 10-year yield still trading below the 2.50% level, the USD index is now back to its January levels trading at 81.31.

On the UK side: We saw lately that the IMF raised its forecast for Britain’s economic growth (for the second time this year) by 0.4% to 3.2% in 2014 (and by 0.2% to 2.7% in 2015). However, there have been a few disappointing UK figures in the last couple of weeks which halted the GBP rally and played in favour of the US Dollar. For instance, the Markit Mfg PMI printed lower than expected at 55.4 (vs 57.2 consensus) in July and Manufacturing Output recorded a surprise fall of 1.3% in May (MoM), its biggest decline since January 2013 according to the ONS.

STIRs: the 2-year UK-US yield spread eased from 44.3 bps in early to 32.6bps, and the short-sterling Futures contract March 2015 is now trading at 99.0, which means that the implied rate is down 17bps at 1%, adding pressure on the British pound.

If we have a look at the IMM market, the net ‘speculative’ long sterling positions fell to 24.9K contracts (from 27.5) in the Commitment of Traders (CoT) report ending July 29. There are down from 56.4K recorded on July 1.

cot-british_pound_sterling

(Source: COT Forex – CFTC’s Commitments of Traders)

Technical chart
If we look at the chart below, we can see that Cable closed the week below its 100-day SMA (in blue) and is now trading 40 pips below it at 1.6821 for the first time in one year. As we said it earlier, the trend looks bearish; the next support on the downside stands at 1.6700.

GBP

(Source: Reuters)

Figures to watch this week: Manufacturing/Industrial output on Wednesday (Aug 6) and Bank Of England meeting on Thursday (Aug 7).

Update on UK and Cable…

The storm on the Euro also impacted the value of the British pound after Draghi’s speech in Brussels last month. Cable is now approaching its strong psychological support level at 1.6700 where there could potentially be some ‘buyers on dip’.

On the UK side, the BoE MPC met on Thursday but as expected nothing new concerning its monetary policy was released. The BoE is still seen as the first major bank to start raising rates in early 2015 (probably Q2); therefore investors are still interested in playing the monetary policies divergence between the major central banks (short EUR/GBP is a popular medium term position to hold at the moment). In addition, the National Institute of Economic and Social Research (NIESR) estimated today that the UK economy have eventually surpassed the pre-recession peak it reached in January 2008 after more than 6 years. NIESR are forecasting a 0.9% growth in the March-May period (tight slowdown compared to the 1.1% estimated between February and April), which would mean that the level of UK GDP stands 0.2% above where it was in January 2008. With an economy that almost faced a triple-dip recession in 2013, Britain has taken much longer time to recover compare to other ‘strong’ economies such as Germany or the US (both returned to pre-cisis level in 2010).

If we have a quick look at the economic indicators, we saw last week that Manufacturing, Construction and Services PMIs all stood well above the 50 (expansion / contraction) level at 57.0, 60.0 and 58.6 respectively. Moreover, industrial and manufacturing output both came in higher-than-expected at 3.0% YoY (vs 2.8% expected) and 4.4% YoY (vs 4.0% consensus) in April.

The rebound we have since in the US yields since the lows reached in the end of May helped the greenback recover against the major currencies this week. The graph below shows you one of Cable’s main drivers, the 2-year UK-US spread (in red). As you can see it, the spread narrowed by 10 bps since the end of May and now sits at 0.291%, which pushed Cable (in Yellow) down by 120 pips to 1.6750.

Cable-Spread

(Source: Reuters)

Based on this analysis, we will try to buy Cable at around 1.6720/30 for a test back towards 1.6800 (at first) with a stop loss at 1.6680 (below its 100-day MA at 1.6688).