Market News & Analysis
Will the pound’s santa rally continue?
Kathleen Brooks December 1, 2016 3:31 PM
So much for the pound’s rally having run its course in November, GBPUSD has taken another leap higher on Thursday. Technical traders may be getting excited by GBPUSD, which popped above the top of its daily Ichimoku cloud at 1.2643, it has cleared this hurdle this afternoon and GBPUSD is currently trading just below 1.27.
So, is this move justified?
This is a difficult question to answer. The UK-US 10-year yield spread is falling deeper into negative territory, as US yields rise at a faster pace than UK yields. Thus, GBPUSD does not have a yield advantage that is driving this pair higher. Instead, we think that the rally in the pound is down to the market reducing its stretched short position in GBPUSD, which could give this rally legs, potentially back to the 1.30 level. CFTC data, which measures speculative interest in the pound vs. the USD, has shown that short positions in GBPUSD have reduced for 6 out of the last 7 weeks, and it appears that this trend could continue. Due to this, we may see further upside for the pound in the coming weeks, due to the following factors:
- Momentum: the reduction in GBP shorts is important to the future of the GBP rally. If we continue to see short positions getting scaled back, then the GBP may continue to rise on a broad basis. Momentum is particularly strong against the yen and its recent performance has been staggering, GBPJPY is up more than 14% since the start of November!
- Political risks around Brexit are receding, as political risks elsewhere start to bite. The cost to insure UK sovereign debt has fallen sharply since spiking back in June.
- Upside risks to growth after a positive Black Friday shopping season, and the potential for an increase in inflation in the coming months.
The technical indicators are also positive, we have already mentioned GBPUSD’s pop above the Ichimoku cloud earlier today, the next key resistance level for this pair is 1.2811 – the 100-day sma – and then 1.3055 – the 38.2% retracement of the June – October decline in GBPUSD, which is a major level of resistance.
However, we will keep an eye on the UK-US yield spread. If this continues to fall further into negative territory then GBPUSD may start to look fragile.
Figure 1: UK-US yield spread and GBPUSD
Source: City Index and Bloomberg
Overall, the pound has stolen the mantle from the dollar as the king of the G10 FX world, and there is every chance that this rally has some legs, we think that 1.30 is a potential for this pair in the coming days.
Figure 2: GBPUSD daily Ichimoku cloud chart
Source: City Index and Bloomberg
More From Kathleen Brooks
- Trump's first 100 days: the honeymoon period is over April 28, 2017 3:10 PM
- Trump's first 100 days: the honeymoon period is over April 28, 2017 11:32 AM
- See More
From time to time, GAIN Capital Limited’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.