Fundamental Forecast for Pound:Neutral
The British Pound was the only major currency to strengthen against the US Dollar in a holiday-shortened week of trading, but can it continue higher? The high-flying Sterling will need support from the Bank of England to hold near multi-year peaks in the week ahead.
A strong wave of domestic economic data drove the lion’s share of British Pound gains, and indeed Sterling strength coincided with a big improvement in UK bond yields. The spread between the UK and US 2-year government bond yields stands at its largest in three years.
It’s with that in mind that we look for any surprises out of upcoming Bank of England Minutes as a potential catalyst for big GBP moves. The BoE released no details in the policy announcement following its April 10 meeting, and we can only speculate as to whether it remained a unanimous decision to keep rates and Quantitative Easing levels unchanged. And though officials would not have final UK unemployment figures released six days later, it will be interesting to hear whether labor market improvements could force the bank to tighten policy ahead of expectations.
The risks to the British Pound are clear: it has thus far set a fairly ominous daily reversal at multi-year highs. CFTC Commitment of Traders data likewise shows speculators are their most long GBP in over three years when it set a significant top near $1.65. And though important price and positioning extremes are only clear in hindsight, the fact that leveraged trades are stretched warns that gains may at least slow.
Traders have thus far seemed willing to push the British Pound to fresh highs, but it may take something special to keep the high-flying currency near these significant peaks. –DR