The British pound (sometimes known instead as pound sterling) is the United Kingdom's national currency. According to a recent survey by the Bank for International Settlements, the pound remains the fourth-most traded global currency. Specifically, 6% of all foreign exchange trading involves the pound.
The British pound is higher today (particularly against the US dollar), and has been strengthening throughout the week. Thanks to strong regional growth and rising rate hike expectations, the British pound remains in a bullish trend. Pound sterling is also benefiting from a particularly weak US dollar, which is currently trading at 3-year lows. Compared to its key regional peers (such as the euro), the pound is relatively weaker. Unfortunately, Brexit-related risks and relatively weaker economic growth continue to weigh on GBP. Turning to the latest Brexit news, the British government is proposing "mutual recognition" as a means to preserve financial services access to the EU. According to the Financial Times, the proposal calls for the UK and the EU to recognize each other's regulatory regimes as equivalent at the point of Brexit. Any future divergences would be monitored by an independent mechanism. The proposal is likely to be contentious, given that Michel Barnier has repeatedly ruled out access to the single market unless the UK accepts conditions including the free movement of people. Our short-term outlook on the pound is neutral, while our medium-term outlook is bullish.
GBP/USD is currently above 1.4120. EUR/GBP is flat, with the exchange rate above 0.8870. The pound is flat against the Australian dollar and the Canadian dollar. GBP/AUD is currently above 1.7720, while GBP/CAD is above 1.7610.
Looking at UK economic data this week, traders will be watching upcoming inflation and retail sales figures. The consumer price index (3% vs. 2.9% expected) was ahead of expectations. The retail price index (4% vs. 4.1% expected) were slightly below estimates while the producer price index (4.7% vs. 4.2% expected) was ahead of expectations. Later today, we'll see retail sales growth. Expectations remain low, given recent weakness in UK consumer spending. Last week, the Bank of England signaled a positive economic outlook while Markit/CIPS services PMIs were below expectations.
As the pound pulls back, we are downgrading the currency to neutral in the short-term. The pound is now trading within normal conditions. This is based on various technical indicators on a daily chart.
As the pound continues to strengthen, we are now bullish on the currency in the medium-term. The pound is now looking trading within normal conditions. This is based on a range of technical indicators looking at a weekly chart.
Policy: Following the Brexit referendum, many expected the Bank of England to extend its zero interest rate policy for many years. Instead, the Bank hiked rates in 2017 following better-than-expected GDP growth and currency devaluation-fuelled inflation. In 2018, expectations for monetary tightening continue to rise thanks to strong regional growth. Looking at politics, Brexit trade negotiations dominate policy implications for the pound. While tangible progress relating to a trade deal with the EU remains limited, expectations are rising that the two sides will eventually close a deal. Pound traders remain hopeful that any future trade deal will give the UK preferential access in the area of financial and professional services exports.
Sentiment: Looking at the Commitments of Traders report, British pound speculators are now net long the currency. In 2017 and earlier, most speculators were net short the currency as markets feared for the worst following the Brexit referendum. In 2018, strong growth in the region is helping the pound recover its fortunes. When pound net positions hit bullish extremes from time to time, the currency is likely to pull back accordingly. Overall, the longer term bull market remains intact.
Economic data: Despite dire predictions, the economy has delivered healthy growth figures since Brexit and has avoided a recession. On the other hand, the weakening of the pound has led to import-fuelled inflation. The most recent figures show inflation surging above the BoE's 2% target. While higher rates of inflation would typically call for higher interest rates, so far the Bank has only delivered one rate hike. Inflation is expected to decrease in 2018 as the pound regains its strength.
Looking at the British pound today, concerns regarding Brexit and the stock market rout are outweighing the Bank of England’s positive economic outlook. As a currency that benefits from rising risk appetite, pound sterling has been selling off sharply in February thanks to fears regarding elevated asset prices. While Bank of England Governor Mark Carney helped the pound last Thursday after saying…
In our last take on the British pound in early January, we wrote that the currency was set to keep strengthening thanks to strong regional growth, moderate sentiment and the historically low value of the pound. More specifically, the currency looks cheap based on broad nominal effective exchange rates (a measure of the pound relative to other foreign currencies). Looking at GBP/USD since our last…
Looking at this week’s COT report, the British pound is now at a bullish extreme, while the Australian dollar is no longer at a bearish extreme. Bullish extremes continue in long euro and long crude oil speculator net positions. The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direct…