Cable nears key multiyear support levels.
01:00, 18 januar 2016
· Av CMC Markets
The pound is one of those currencies that once a trend is in place it becomes very difficult to stop, particularly when markets fall out of love with it.
In 2014 the pound fell 12% against the greenback for seven straight months, starting in July 2014 on the back of diverging interest rate dynamics as well as concerns about the Scottish referendum.
After a brief rebound this downward trend re-emerged in November with the prospect that we could well revisit levels last seen at the height of the financial crisis in 2008/2009 when the pound hit lows of 1.3500, before rebounding sharply.
A large part of the reason the pound has suffered against the US dollar in particular is because of the expectation that US interest rates are likely to rise further, while UK rates are likely to stay anchored near the levels they’ve been at for the last 82 months.
Some have surmised that Brexit concerns have hit sentiment in the pound and it is certainly an easy argument to make but for that argument to stick you would expect to see similar declines against other currencies as well.
That argument starts to fall apart when you look at the performance of the pound against its other G10 peers since February 2014, where it has outperformed most of its major peers with the notable exception of the US dollar, where it has performed exceptionally poorly, and the traditional haven currencies of the Swiss franc and Japanese yen.
Chart by Bloomberg
Its underperformance against the US dollar is a particular concern especially when you look at its performance from a historical perspective.
It is currently looking to post its third consecutive monthly decline in a row against the US dollar and it is being hit especially hard due to the interest rate differentials between UK and US rates which on the 2 year measure is at its widest level in 25 years in the US dollar’s favour, which suggests it may have gone too far in the US dollars favour.
The rise in the US dollar appears to be driven by the expectation that the Fed could well increase rates a great deal further over the course of the next year. Given some of the economic data coming out of the US this belief seems rather misguided at best.
The current fall in the pound is now at some importantly historic support levels, which if they hold should respect the historical range of the last 25 years, where we’ve seen the base come in in and around the 1.4000 area.
Even so we could still be on course for cable to post its lowest monthly close since early 2002.
Even in the midst of the financial crisis in early 2009, despite hitting lows of 1.3500 it still managed to close the month well above the 1.4200 level, yet due to receding expectations of a rise in interest rates here in the UK it has slid over 7.5% since the beginning of November.
In fact in the last 30 years the last time the pound closed on a monthly basis below the 1.4100 level was way back in 1985, when it was on the way from recovering from its all-time low against the US dollar at 1.0520 in March of that year.
In this context these levels do mark an important area of support for sterling, which at current levels could prompt significant further losses as well as volatility in the short term if they were to give way to the downside.
For now the key support sits at 1.4220 which is the May 2010 lows in the aftermath of the UK General election hung parliament.
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