The market was broadly satisfied by The Bank of England rate cut and quantitative easing announcements on the 4th of August. As such cable has seen a bounce from the all-time lows, with positive data (retail and inflation) and covering of large speculative shorts that had been built up (w/e 16th August record net shorts were 94, 238) which has exacerbated the move up and should continue to provide upside pressure with more profit taking. Renewed M&A activity is also acting as a barrier to the downside, as UK companies and assets look cheap. We feel from here cable could move higher to the 1.35 region in the short term.
Recent Fed announcements have been dovish, however it is also fair to say that Fed communications have also been erratic this year. Indeed Goldman Sachs sees the pound, yen and the New Zealand dollar as most vulnerable to a any hawkish overtones by The Federal Reserve in the coming weeks. Indeed, Chair Janet Yellen’s speech today at the annual monetary-policy symposium in Jackson Hole, only increased the probability of a US rate hike prior to year-end.
With this in mind, the 20-21 September meeting will probably be the last time The Fed. will be able to hike as it is highly unlikely they will anything during the US election period in November. This coupled with DXY technical picture showing upside target of a 99 handle (currently 94.72) indicates to us that 1.34 should be an entry point to scale into shorts in GBPUSD with stop above 1.3650 (the 38.2% retracement of the pre-Brexit move). We would advocate initially targeting a move to 1.2750.
EURGBP is more nuanced and while the European economy is starting to exhibit positive signs, disparate corners of the European Empire are in such disarray that some commentators are now positing ‘Brexit’ as a long term masterstroke. Having said that, it is clear that both Europe and Britain are at an impasse. Like two spotty teenagers at their first prom dance, neither seems willing to make the first move. Therefore we are more tempered on EURGBP simply due to the greater number of moving parts. EURGBP top side we see around 0.87, a level which would garner significant European interest in UK assets.