With a still weak recovery, the only thing driving the GBP higher is improving expectations for rate increases. Events this past week fed those expectations.
Positive GBP Fundamentals
The big story Thursday-Friday in currency markets has been the GBP, up for the 2nd day due to:
1. Strong retail report Friday: UK Retail Sales recovered in January, as consumer spending made up for the weak Christmas season that was hindered by bad weather. UK Retail Sales rose 1.9% versus the 0.9% forecasted. On a year over year basis retail sales are up 5.3% as UK economic activity accelerates after the disastrous Q4 2010 GDP contraction. The ONS stated that the January number was the strongest in more than 7 years.
2. Hawkish comments by MPC member Andrew Sentance
3. Rumors that MPC member Bean may become the third hawk on the committee.
4. After Wednesday’s BoE inflation report a number of big institutional economists moved up their expectations for the next GBP rate increase from November to May 2011, with short GBP futures pricing in a 75 bps increase in 2011. As these are likely to come in 25 bps increments, that leaves 3 chances for bullish speculation to develop in the coming 9 months for the British Pound
The above developments have clearly outweighed the affect of BoE Governor King’s dovish comments earlier this week.
Next Week: MPC Meeting Minutes Loom Large As Next GBP Test
The above developments also mean the February 23 MPC meeting notes becomes next big risk event for the GBP, and if markets interpret the minutes to suggest a more pro-rate hike leaning, that could send the GBP on further rally, despite a dovish tone this past week by BoE Gov. King. Public sector net borrowing, reported the day before on Tuesday, February 22, could also have an impact on the Pound, as will housing and revised GDP figures later next week.
However it’s the MPC meeting minutes that will provide the most direct view of what those who make rate hike decisions are thinking.
Beyond these, the economic calendar next week is fairly light, with US core durable goods and preliminary GDP q/q the other big scheduled events. More China tightening is bearish for markets, but if rate increase expectations keep moving higher the GBP could well resist all but the most bearish news in the coming week.
The Technical Perspective For the GBP
Note the daily USDGBP chart below.
GBPUSD DAILY CHART COURTESY OF ANYOPTION.COM 08FEB18 1509 D
The daily chart suggests solid upward momentum as price broke decisively through resistance around 1.600 and pushed into the upper 2 Bollinger Bands, the ‘buy zone that suggests strong momentum for more upside. While there is real near term resistance ahead at the prior top from November around the 1.6300 zone, a look at the weekly below reveals that if the cable can clear the 1.6300 resistance area it has room to run up to the 1.6530 zone, and after that up to the 1.6847 zone.
GBPUSD WEEKLY CHART COURTESY OF ANYOPTION.COM 09FEB18 1521
How To Profit inthe Coming Days
Short term, the above are bullish for the GBP
For Currency Traders: That lends an upward bias over the coming days to the GBPUSD, GBPJPY, and a bearish one to the EURGBP
For ETF Traders: Long Bullish GBP ETFs: FXB, GBB, and FXE.
Long Related Short ETFs of the Pound’s primary currency pair counterparts: Like those of the USD, EUR, and JPY, specifically:
- USD: UDN
- EUR: EUO
- JPY: YCS
Short the Related Bullish ETFs of the Pound’s Primary Currency Pair Counterparts
- USD : UUP
- EUR: FXE, ERO, EU ULE
- JPY: FXY, JYN, JYF, YCL
Binary Option Traders: Note the 4 hour GBPUSD chart shown below
GBPUSD 4 HOUR CHART COURTESY OF ANYOPTION.COM 10FEB 18 1538
Those using 1 day options should note the overall short term trend remains firmly higher, suggesting a bias to 1 day call options. The above longer term charts suggests those playing daily or weekly trends next week could consider calls on a break over the 1.6300 resistance, and puts if that resistance holds.
Disclosure: Author short the EUR for personal portfolio.
Disclaimer: The above is for informational purposes only and not to be construed as specific trading advice. Responsibility for trade decisions is solely with the reader.