Market Analysis

357 Reasons For Cable Bears to Pause For Thought?

Bank of England Governor Mark Carney is skipping this year’s Jackson Hole Symposium hosted by the Kansas City Fed even though many of his central bank peers, including ECB chief Mario Draghi and Fed chair Janet Yellen, will be both attending and speaking. Deputy Governor Ben Broadbent, often mooted as a possible successor to Carney, is attending in Carney’s stead. There was “no specific reason” for Carney’s no-show said a BOE spokesperson. So presumably the continued weakness of sterling wasn’t a factor. And sterling is undoubtedly weak. As US firm BNYMellon explained on Wednesday “the GBP index has weakened by 2.9% since the 6-2 vote by the Bank of England’s (BoE) Monetary Policy Committee (MPC) on August 3 to leave policy unchanged” leaving the “index now trading at levels that have barely been seen before.” That doesn’t mean the pound can’t weaken further especially given that sterling’s diary is full of risk events in the coming months, beginning with the next round of EU/UK negotiations on August 28, but it should give traders some pause for thought. On the downside some analysts have been pondering whether Cable (GBPUSD) could drift down to its 200-day moving average level, currently at $1.2650.

Dutch bank ING feels that “GBP continues to trade on a very soft footing” and the Dutch bank is now wondering “whether the BoE will highlight the threat of rate hikes again, largely to support.” ING feels “Cable could run into trouble were support to yield in the 1.2770 area.” But BNYMellon makes the point that since 1971 “there have only ever been 357 closes below current levels for GBP against the USD.” That doesn’t mean that 357 number won’t rise but it might suggest to traders that from an empirical standpoint continued closes below current levels in Cable may be less likely than closes above. Whether overall bearishness on sterling conquers such a consideration, whether it might tempt some sterling bears to take some risk off the table or whether it prompts traders to diversify their negative view on the pound away from cable into another pairing are all matters of personal choice. But these are issues that arguably should all be borne in mind when formulating a trading strategy in Cable given current market conditions.

Written by Neal Kimberley, External Currency Analyst.