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).

Quick BoE Minutes review

As expected, the Committee voted unanimously in favour of maintaining both the Official Bank Rate and the stock of purchased assets steady at 0.5% and £375bn respectively. Since Carney’s speech at the Mansion House in the middle of June, the Bank of England will be the first ‘G7’ central bank to experiment a rate hike and the market is pricing it for early 2015 (February according to Reuters’ polls).

The minutes enhanced today the importance the ‘qualitative guidance’ and stated that even though the unemployment rate keeps decreasing at a faster pace than the Committee anticipated (currently at 6.5%, down from 7.6% in August 2013), the ’employment growth over the past year had been concentrated in lower-paid sectors’ which is problematic for the outlook of household spending. For instance, if we have a look at the Average Weakly Earnings (ex bonuses), British workers’ earnings grew by an annual 0.7% in the three months to May, its slowest rate on record.

STIRs and Cable:
If we look at the short-sterling interest rate futures (March15 contract), interest rate traded on LIFFE London, we can see that the implied rate (100-price) increased by 26bps to 1.17% in mid-June before edging back to lower levels (currently trading at 1.03%). The 2-year UK-US spread (see below in red), a popular Cable driver that the market watch since Carney introduced ‘forward guidance’ back in August 2013, peaked at 43.7bps in Mid June and is now trading 8bps lower at 36bps.

UK-spread

(Source: Reuters)

The rise in UK yields based on a hawish BoE tone raised interest for the British pound against the major currencies; short EUR/GBP (monetary policy divergence) and long GBP/USD (based on a macro perspective and BoE being more ‘active’) have been popular trade to hold.

However, Cable has been trending lower for the past couple of weeks and hasn’t managed to break the 1.7200 level last week with the Fed making a move also on its rate policy (Yellen’s Testimony, see article Markets after Yellen). The pair is trading at 1.7050 at the moment and seems on its way to re-test the 1.7000 – 1.7020 area in the short term. Some bids are seen in this area, however we would suggest waiting for 1.6960 – 1.6970 for a buying-on-dips opportunity.

Figures to watch this week:
Tomorrow (July 24): UK Retail Sales, expected to increase by 0.3% MoM in June
Friday (July 25): First Q2 GDP estimate, expected to grow by 0.8% QoQ