THERE ARE REASONS TO TREAT THE POUND’S RISE WITH CAUTION
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
THE pound has been on an uninterrupted rise, following the fortunes of the global equity markets and it hit a fresh high of 1.6743 against the dollar. on Tuesday. But now that cable has gained 22 per cent off its lows, can the rally continue?
There are several good reasons to be sceptical about any further rise in the pound. First and foremost, the pace of improvement in the latest UK data has slowed markedly – this week’s purchasing managers’ surveys could be critical.
Secondly, the UK political situation remains tenuous with Gordon Brown and the Labour party recording low approval ratings. If there is an unexpected early election the political turmoil is likely to cause the pound to weaken. Currency markets despise instability and traders tend to sell first and ask later.
Lastly, the country’s debt is quickly rising to 200 per cent of GDP, which is unsustainable in the long run, and if investors lose faith then capital flight might ensue.
One possible way to express a negative view on the pound could be through a long euro-sterling position. The decline in the pair from the 0.9805 top to a recent low of 0.8400 appears to have found support at these levels. If cable does weaken over the summer a long euro-sterling trade could be a low risk way to participate in the decline.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected].