GBP rallies as optimism rises

Andria Pichidi HFM

The Pound extended higher on data suggesting a post-UK-election rebound is afoot. This saw Sterling print respective 5-day and 2-week highs against the Dollar and Euro.

The January CBI’s industrial trends survey showed business optimism to have leapt to a reading of +23 from -44, although headline activity remained low. This followed yesterday’s above-forecast UK labour report. The readings will add to hopes for a strong preliminary PMI report on Friday, which would undermine any argument for a rate cut from the BoE.

Meanwhile data have been descaling expectations for the BoE to cut rates, Cable capped Friday’s resistance around 1.3117, pushing further to the upside on the back of a reduction in probabilities of a rate cut from 70% to less than 50%. The BoE is expected to refrain from cutting rates at this juncture, and instead opt to ratchet up dovish guidance. Policymakers will still be looking to see the full impact that the lifting of Brexit and political fog has has since the election in mid December, especially with the global economy looking to be holding up, and with the government set to pursue a more expansive fiscal policy.

From a technical perspective, bulls still hold near-term control as price keeps above the key 1.3100 level and the hourly moving averages. However further upwards move needs further validation, technically from a confirmed cross of 50- and 200-period EMA and fundamentally on PMI data on Friday.

Next Resistance levels are set at 1.3130 and 1.3170. On the flipside, a pullback could be supported on the 1.3060-1.3070 area.

Next UK data of note will be the flash January PMI survey, on Friday, after the BoE decision, which should show a rise in the composite headline, to 50.5, from December’s 49.5 reading. This matches the consensus forecast. Note that the latest week CFTC data shows the longest net long positioning in sterling futures by speculative accounts since April 2018, which seems to reflect expectations for there being a post-election lift in economic activity in the UK.

Author

Andria Pichidi

HFM

Having completed her five-year-long studies in the UK, Andria Pichidi has been awarded a BSc in Mathematics and Physics from the University of Bath and a MSc degree in Mathematics, while she holds a postgraduate diploma (PGdip) in

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