Date: 19 Jul 2017

“I declare after all there is no enjoyment like reading” may be the Jane Austen quote adorning the new ten pound note unveiled on Tuesday by Bank of England Governor Mark Carney, but there was precious little enjoyment for sterling bulls who read the day’s UK inflation data. As US bank BNYMellon wrote, UK CPI had its biggest fall in two years, dropping to “2.6% y/y in June from 2.9%, where it [had been] expected to remain.” But if the sterling bulls have been run for the moment will Sense and Sensibility prompt them to return, or will they need some Persuasion? Traders won’t find the answer in either of those Austen novels but BNYMellon contends that “the summer of 2017 may yet end up resembling the market conditions from 12 months earlier when an unusual air of placidity settled over GBP once the initial fall-out from the EU referendum had subsided. Despite a 25bp rate cut by the BOE in August 2016 and talk of further easing if required, GBP remained remarkably stable through until September of last year. This might provide something of a clue as to how the currency could perform this summer.” Of course the difference between now and last year, is that traders can have no certainty that domestic UK political infighting will cease. After all, after the initial shock of last summer’s UK vote to leave the European Union and David Cameron’s immediate resignation, it didn’t take long for the governing Conservative Party to unite around Theresa May. May’s authority was then unquestioned. but is now under scrutiny. But if traders cannot know how the politics will unfold through the UK’s summer months, they can make a judgement on whether or not the prospect of a UK rate hike is closer or further away. Writing about recent commentary from Bank of England policymakers that has seemed more hawkish on a rate hike. and writing ahead of Tuesday’s UK inflation data, Swiss bank UBS wrote “in our view, the timing of this sudden hawkish swing is distinctly puzzling, as it has coincided with a clear and widespread cooling of important activity indicators which strongly suggest the economy is continuing to lose momentum after its weak start to the year.” There’s arguably no reason to expect the pound to keep selling off following Tuesday’s UK inflation data as short term positioning may already have been washed out. But neither does that mean Sterling bulls will necessarily be charging back in, even if Jane Austen is on the new ten-pound note. Those who wish to express a dollar short stance might see better opportunities elsewhere than in Cable (GBPUSD).

Written by Neal Kimberley, External Currency Analyst.