Sterling: It’s Complicated
The Bank of England delivered a hawkish hold on Thursday but markets remain acutely aware that event risk around Brexit remains heightened. Additionally, even those traders who might see the evolution of the BOE’s view as GBP-supportive will be conscious of the fact that, in circumstances of stock market turbulence, the US dollar can (but doesn’t always) exhibit safe haven characteristics. That flight to USD may not necessarily be the case at this precise moment in time (with US Treasury yields elevated even as money has been being pulled out of US equity markets) but that doesn’t mean it won’t happen. If it does, cable (GBPUSD) might not be the optimal way to express a positive view on the prospects for the pound. Some analysts have already argued that in light of recent CFTC data revealing the continuing existence of a very significant long euro/short greenback exposure and with the event risk surrounding next month’s national election in Italy, an alternative way to express confidence in sterling would be through EURGBP. But again there’s the issue of Brexit which, in the case of that cross, can be particularly influential.
Also, if the US’ twin deficits become more of a market focus, the United Kingdom, which also runs twin deficits, may also come under scrutiny. The Bank of England, without really making any solid commitment, has said UK rates could be going up somewhat quicker and further than the BOE had envisaged back in November. In a normal environment that would likely underpin the pound for some time. The problem is that this is not a normal environment. Traders can’t take anything for granted.
Written by Neal Kimberley, External Currency Analyst.