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Sterling at fresh 3 year highs eyes more gains

Article By: ,  Financial Analyst
February 14, 2014 5:42 PM

Sterling hits 3-year highs against the US dollar at 1.6743 as markets anticipate the Bank of England to be the first central bank in the G10 most likely to raise interest rates.

No tapering, no hawkishness, but simply hiking benchmark rates from 0.50%, is seen in Q1 2015 at the latest.

GBP strongest currency over the past 12 months

This is not just a story of the past week or prior month, but of the past 12 months. Thus, since February 14 of last year, GBP has been the best performing currency against all major 11 currencies , +8% vs. USD, +6% vs EUR, +16% vs JPY and +20% vs. AUD.

The theme of consistent upside surprise in economic data has become as familiar as the frequent notion that poor 2012 performance was no great challenge to beat.

Sterling’s stellar performance is especially highlighted by the fact that receding inflation towards the BoE’s 2.0% target has emerged alongside a persistent decline in unemployment –also towards the BoE’s threshold for considering higher interest rates. And despite slowing inflation, 2 year and 10 year gilt yields have now stood above their US counterparts for over 6 months.

Unlike in the case of the US where high bond yields are usually viewed with suspicion relative to the strength of the overall economy, rising UK yields are seen as an actual prerequisite to cool any potential bubbles in housing.

Cable turns wireless?

GBP/USD has risen 6% above its 200-week moving average, which is the highest positive cross-over since November 2007. The chart below shows that the highest cross-over above the 200-WMA average were in November 2007 and December 2004 at 13% and 21% respectively.

Both periods coincided with the end of tightening cycles.

With the current deviation at merely 6% above the 200-WMA, it would be safe to surmise that another 4-7% increase in GBP/USD may be within historical trends?

An additional 4% rise would imply a 10% deviation at $1.74, which the highest since October 2008.

Whether the improvement in UK fundamentals ceases to be a case of base comparisons and more of a reflection of outright economic expansion will be monitored by the bond market and the unemployment rate.

And if the Federal Reserve reaches for the “pause” button in its tapering next month, then cable could well turn into wireless.

 

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