GBP: Trading in a volatile trajectory – BBH
Sterling posted a key reversal against the dollar on August 3 by making new highs (a little above $1.3265) and then dropping through and closing below the previous day's low, notes Marc Chandler, Global Head of Currency Strategy at BBH.
Key Quotes
“A 3.25 cent decline followed to the pre-weekend low of $1.2940, just ahead of the 50% retracement objective of the low from June 21, the last time it traded below $1.26. Sterling posted potential reversal ahead of the weekend; recovering to close almost (1/100 of a cent below) at the previous day's high. A move above $1.3050 would lend credence to our suspicions that the corrective low is in place.’
“The economic reports in the days ahead are unlikely to alter the general understanding of the UK economy. Growth has downshifted, and consumption has slowed. The labor market is robust, but wage growth is slow and slower than inflation, which remains a firm and above target.’
“The BOE's preferred inflation measure (CPIH) is expected to tick higher to 2.7%, though for the second consecutive month prices were likely flat. The past depreciation of sterling appears to be a key factor, and therefore, it is still reasonable to expect price pressures to peak in the coming months.”
“Meanwhile, the UK claimant count has been gradually rising since Q4 16, but the unemployment rate (likely remaining at 4.5% for the three months through June) is the lowest more than 40 years. Wage growth, similar to what is being experienced in many other countries, remains limited. Average weekly earnings in June are not expected to have changed from the 1.8% (and 2% excluding bonuses) reported for the three-month year-over-year period through May.”
“UK retail sales are volatile month-to-month. A moving average helps smooth it out to see the trend It has clearly slowed. Last year the retail sales rose an average of 0.4% a month. In the first half of 2017, the pace has been halved. The median forecast in the Bloomberg survey was for a 0.1% rise in July after a 0.9% gain in June, and the first back-to-back increase since last summer.”
“Investors seem skeptical of the UK. Sterling was not rewarded when the recent PMIs were generally stronger than expected. To the contrary, thoughts that the BOE may begin normalizing policy has been unwound. The implied yield on the December short sterling futures contract has fallen 17 bp to 35 bp since the end of June. It had finished 2016 near 47 bp.”
“However, the place to express that skepticism may not count against the US dollar, which has its own challenges. On a trade-weighted basis, sterling has fallen 4.5% in the past three months. Sterling's weakness is seen through the euro. Since the days before Macron won the first round of the French presidential contest, the euro has risen 9.5% against sterling. The euro poked through GBP0.9100 briefly at the end of last week. It was near GBP0.8300 in mid-April. The technicals look stretched and the euro is bouncing against the upper Bollinger Band, but short-term participants will want to be particularly attentive to potential reversal patterns.”