GBPUSD: 24 Hours After Carney …

The pound continues to extend gains after Wednesday's surge higher post the Inflation Report. The GBPUSD range was a whopping 300 pips, with the pound ending up at its highest level since 20th June.

Now is the time to decide if the move higher in sterling is the real deal or if the pound gains are limited.

The argument for further GBPUSD gains:

The recent spate of good economic data supports a stronger pound as forward indicators of future growth (like the new order components of the PMI surveys) point to a continuation of this positive economic momentum.
The yield spread between the US and the UK is now GBP positive (see chart). It widened sharply on Wednesday and continues to extend gains today. Further widening would be GBP positive.
The pound is also benefitting from dollar weakness. Since the disappointing July payrolls the USD has traded with a bearish bias, even brushing off some hawkish commentary from Fed members in recent days. It appears that the markets do not believe that tapering is tightening, and thus expectations of tapering are not having an upward impact on the greenback.
The argument to fade the GBP move:

Further gains are dependent on economic data, as this will determine the future of monetary policy in the UK. Thus weakness in UK data, particularly unemployment data, could weigh on GBP.
If bond yields continue to rise, which is exactly what Carney and co. at the BOE do not want to happen, then we could see the BOE's forward guidance become more aggressive in the coming months, which may weigh on the pound.
Overall: we tend to think that the fundamental picture is still positive for GBP unless 1, UK economic data starts to tank or 2, we get more aggressive forward guidance from the BOE.

The technical picture:

GBPUSD had a forceful move higher yesterday with a wave of buying interest coming in as the market digested a less radical than expected Inflation Report from the BOE. Key resistance lies at 1.5540 – the 200-day moving average. This has thwarted the bulls so far, but the pullbacks have been shallow, suggesting the momentum is still to the upside for cable.

Above 1.5540 opens the way to 1.5600, then to 1.5640- the 50-week moving average and the highest level since early July. 1.5750 is still medium-term powerful resistance, the double top from mid-June. Support lies at 1.5480 in the near term, then 1.5380 – the top of the daily cloud.

Takeaway: the momentum for cable is still to the upside, a weekly close above 1.5540 – the 200-day sma – would be a very bullish development. Overall, if UK economic data can remain upbeat we could see a medium-term uptrend in GBPUSD back to the mid-June highs above 1.57.

IMOH, Clement I.
+234 802 905 9344
+234 703 569 1707