Shakespeare may have written, “This blessed plot, this earth, this realm, this England,” for a glorifying soliloquy by King Richard II, but even words cannot sustain the Pound on its lofty perch forever. Cable had achieved a bit of stardom in 2014, as one of the few major currencies that had broken ranks versus the USD and flown high on gossamer wings. Lately, however, the Pound appears to be in tumble mode, slowly bouncing down a new channel like a slinky down a staircase.
It was only a few weeks back that Mark Carney, the head of the BoE, was pounding his chest with pride, almost bragging to the gathering throngs at an evening speaking engagement. According to him and his mates at the central bank, the British economy was moving along forthrightly with minor issues that had been dealt with at their previous meeting. The primary problem was an over-heated housing market, but mortgage qualifying criteria and limits had been raised to address the appreciating bubble, something referred to as “macro-prudential measures.” Carney then hinted broadly that interest rates might be raised early after all, before the end of 2014.
The market loved his hubris and quickly sent the Pound north to re-test strong resistance that had been tested many times before. But, as the old adage warns, pride does goeth before a fall. Manufacturing sector data released last week was miserable, and more bad news came from the construction arena to cause cable to slink once more down the staircase of its latest channel. One more “slink” would bring it down to $1.705, a level that many analysts claim to be vital support, as depicted in the following chart:
Today’s drop found support at the intersection of the lower channel diagonal and the lower boundary of the very present Kumo Cloud. Where will the pound go from here? This week is filled with testimony from the likes of Yellen, Draghi, and Carney, himself, but analysts are looking beyond these risk events to the release of British CPI figures on Tuesday, as the determining factor for future directions.
The CPI inflation index measures movement in consumer prices, which tend to rise when there is a true economic recovery in place. If it declines or is near zero, as in the European Economic Union, then the resulting deflation must be addressed, typically by adding stimulus to the market. If inflation rises, the counter balance is usually to raise interest rates, the prescription the market expects in the UK. Unfortunately, the UK CPI fell off the table last time around to 1.5%, recording its lowest level in nearly five years. The Street is expecting little change this week, but the market is primed to over react to whatever news comes down the pipe.
A strong Pond may be a boon for importers, but it is a thorn in the side of exporters. If it remains strong for too long, it could act as a damper on economic growth, while lower-priced imports flood the market and thereby cause the dreaded deflationary spiral. Why are many countries having difficulty with deflation? Commodity prices have been falling of late. The CRB Index offers guidance on how prices are moving for a chosen basket of commodities. Lately, this index has collapsed, falling 5% since the end of June.
Traders are eyeing these data points carefully and have recently begun to shorten their long positions in the Pound, if the latest CFTC Commitment of Traders Reports are to be believed. Mark Carney, another Icarus in the making, might want to check the wax on his wings before attempting another sunny flight of fancy.
Tagged as: GBPUSD
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