Market Overview

30 July 2021

Pound’s Rally Might Not Be a Sterling One

The British Pound is among the most prominent currencies that are seen to be benefiting from the U.S. Dollar weakness in the end of July. And, there are several drivers that seem to be pushing the Pound upside.

The U.S. Dollar is consciously being pressured by the Federal Reserve (Fed) with its loose monetary policy. The Fed and its Chair Jerome Powell reconfirmed recently its commitment to continue quantitative easing policy with pumping as much as $120 billion each month for an uncertain period of time. And this policy continues to be a flagship despite extremely high inflation rates, far above the Fed’s 2% target. But June’s annual inflation which is at 5.4% seems to be a minor headache for the Fed as it considers such spikes in prices transitory and under control. That being said, the market seems to consider the Greenback as a sell-off target to shift to other alternative riskier assets.

Negative GDP data in the United States, where the economy rose just 6.5% in the second quarter missing analyst expectations at 8.5% contributed to the Dollar weakness. Initial jobless claims in the United States at 400,000 also were above expectations at 380,000.

But the Pound has its own drivers for growth amid slowing down number of new COVID-19 infections in the United Kingdom. Recent fears of widespread of the new Delta strain in the UK seem to be vanning.

That resulted in the rally of the Cable from 1.3600 as of July 20 close to psychological important level of 1.4000. And here a true challenge for the Pound may be expected as it tries to break through this strong resistance level. It may also be expected that the meeting of the Bank of England on August 5 could curb any further rally of the Pound. As the regulator may point out the weakness of the domestic economy and continuation of the stimulus policy. And it has several justified reasons for it, more that the Fed does. The UK’s GDP in the first quarter of 2021 contracted by 1.6% while in the U.S. it was up by 6.4%. June inflation in Great Britain was at 2.5%, while in the U.S.  it was at 5.4%. If the Federal Reserve considers it appropriate to run stimulus measures in such conditions then why would the BoE have to stop? Even if the Fed would announce the reduction of its bond buying program at some point, the Dollar may continue to weaken for some time, and that means a stronger Pound may continue to undermine competitiveness of British exports. So, the most possible scenario may be that the BoE may signal a weakening of the Pound. So, if such a rhetoric turns out to be true together with technical signals of reversal from 1.4000, it may be a point to consider when it  comes to sell options with a first target at 1.3900.

Alternatively, if the Cable breaks above 1.4000 and reconfirms this level as a new support, long position with targets at 1.4100-1.41300 may be considered.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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