Last week was another when the data calendar provided abundant information disclosing the status of the British economy. Amongst the reports this week were the following: the CPI M/M up 0.4%, better than the expected 0.3% and last periods 0.2%. On a Y/Y basis, the numbers were up 1.8 versus 1.7% expected and the previous 1.6%.
A subsequent report revealed the retail sales, excluding gas, which on a M/M basis was up 1.8%, expected up 0.5% and the previous period's plus 0.1%. The Y/Y numbers were even more impressive - up 7.7% versus the expected up 5.4%, and the previous periods 4.9%.
The Q/Q GDP was a disappointment for the sterling bulls, up 0.8% versus 0.8% and 0.8%. Still, a Y/Y growth rate of 3.1% tops among the G-7 members. Trade in the GBPUSD (FXB, UUP, UDN) was down on Thursday, reflecting a report that Public Sector Borrowing was higher rather than the anticipated lower number.
Still, for the week, the pound continues to trade higher. For traders, especially those with a contrarian bent, the trend remains up and the pound continues to respond in an orderly fashion.
The bull run in the pound is not a newly discovered trade. The last COT report showed specs to be net long 54,671 contracts of combined futures and delta adjusted options. The high was 69,970 contracts in the COT report of April 15th 2014. Though there has been some profit taking after the failed assault on the 1.70 handle, a sizable long remains.
The size of the open interest in the futures market sometimes provides clues that a bull run is mature. The CME volume and open interest report from May 21, 2014 showed total OI in the British pound futures to be 240K, almost as big as the 269K in the euro on the same day. The British population is only about 64M, far fewer than those who use the euro, but the futures trade in the pound is 89% of the open trade in the euro. Trading the pound has become quite popular.
Breakout in the GBPUSD began at the beginning of September 2013. The par was trading around the 1.55 handle. It subsequently bolted through the 200 day SMA, and commenced the 1500 pip trek to the cusp of 1.70. At the beginning of the move, the OI in the CME futures market was only about 150K, September 2013, 90K less than the current OI.
The trend has clearly been higher, a pattern of higher highs and lows. There have been moments when the resolve of the bull has been tested. The daily chart shows six or more instances where the lower level of the Bollinger Bands (20) have been approached or broken.
The bear case for selling the pound is mostly technical. The OI is large, the specs are big longs, the market failed to conquer the 1.70 level, and the trade at 1.667.90 is getting ever closer to the advancing lower BB. Still, we need more than just technicals if we are going to challenge this trend.
There is the possibility the currency markets can be startled by the prospect of political change. Weekend election results across Europe for the European Parliament confirm this possibility. One commentator described the results as a Euro Earthquake:
Stunning victories in European Parliament elections by nationalist, Eurosceptic parties from France and Britain left the European Union licking its wounds on Monday and facing a giant policy dilemma
Across the continent, anti-establishment parties of the far right and hard left more than doubled their representation amid voter apathy, harnessing a mood of anger with Brussels over austerity, mass unemployment and immigration.
The British are quite angry with what they perceive as arrogant elites in Brussels who routinely tax and make expensive regulations without consultation. This is partly responsible for the growth of The United Kingdom Independence Party (Ukip). The Telegraph had these comments in January:
Despite mounting evidence to the contrary, the myth that Ukip's support is driven by voters with an obsessive interest in Britain's relations with Europe remains well entrenched. The underlying logic is clear enough: Ukip were founded as an anti-EU pressure group, their leaders talk a lot about Europe and so their voters must similarly be motivated by mistrust and anger toward those Eurocrats in Brussels and Strasbourg. This myth is having a profound impact on British party politics, leading many to assume that holding a referendum on the country's EU membership is the only possible way of fending off the Ukip challenge.
The British weekend vote for members of the European Parliament was a shocker. The Guardian reported:
Ukip has stormed to victory in the European elections, performing powerfully across the UK. It now has MEPs in Scotland, Wales and every region of England. It is the first time since the general election of 1906 that a party other than Labour or the Conservatives has topped a national election.
The Ukip party ended with 27.5% of the vote, more than any other party, and this gives them 23 MEPs. Since this is the last general election before the one in 2015, these results are significant and a cause for concern with both Tories and Labor.
The EU Parliament has now held two days of meetings. There is a significant increase in the number of anti austerity and anti single currency representatives. Will this alter the policies of the Germans and their allies? And if so, would this not be friendly for sterling?
It should be noted the euro has been losing to the pound. Since February of 2013, the euro has depreciated from over .88 to under .81 pence. This illustrates the success of the Brits' stimulus programs contrasted to the failure of the German austerity formula. Some of the recent losses in the euro are caused by anticipation of looser monetary policies on the Continent and the eventuality of higher rates in Britain.
A major complaint by UK residents is the unrestricted immigration within the EU. The healthy business climate in Britain compared to the Continent has resulted in the migration of 201K from the EU to Britain in the past year. This compares to 158K in the previous year. Many are poor and unskilled moving from Romania and Bulgaria.
Energy policy is another major difference between Britain and the eurozone. There are estimates of deposits of both shale gas and oil in the UK. Further, the UK politicians have the guts to confront the Green Party, who prefer alternative energy sources.
A fundamental reason for selling the pound escapes me, so I think it is best to examine the longer-term charts. Often, the short-term charts contain too much random market noise, and you can learn from an overview.
From the weekly chart, we can see the GBPUSD broke above the 200-week SMA in September of 2013 -- the weekly trend is powerful. Only twice did the market back off to the 20 week average, and then quickly it rallied. The chances are a return to the 1.6670 should be bought. The trend is still in place.
The monthly chart is even more interesting. Sometime in 2015, it is possible the GBPUSD will trade as high as 1.85. Buying breaks in the pound is still the way to play this market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.