Hi All! Ive got a few questions yesterday regarding my ST/LT outlook for GBP and whether should we convert everything now given the pounds massive rise from last May. (+17% or so mind you) Allow me to elucidate this whole matter (for those interested) Fundamentals: The UK economy has recovered substantially-Manufacturing PMIs are at 5 year highs, GDP growth outstrips all of the G5 industrialized countries and unemployment has fallen to 6.5% ( Mark Carney, governor of the BoE has promised previously that QE will end at 7.0% and hike interest rates soon after) Higher interest rates means higher carry yield for GBP and the GBP in turn is expected to appreciate. The market, has priced all this anticipation of a impending rate hike and we see Sterling trading at 5 year highs now . On the other side of the equation, property inflation in London has skyrocketed - this has pushed inflation to a current 1.9% (the BoE has a mandate to keep inflation below 2%, anything higher they have to write some sort of explanation letter to the Chancellor of Exchequer) Hell, Carney himself has advocated for a higher sterling so that the UK can ease import inflation. So while all this news should get us worried- I think LT wise, we really should not 1) Everything that needs to be priced in for an impending rate hike/ hikes has been overdone. We are trading at 5 year highs. 2)The UK sees potential in a taper off of Economic growth in the year ahead- I refer you to this: forexlive/blog/2014/07/23/carney-eases-cable-through-1-7030-as-recovery-worries-come-to-the-fore-23-july-2014/ 3) Perhaps most importantly, wage growth (the key indicator the BoE uses to ascertain slack in the labour market) is still benign. Structurally, the UK economy is still kinda torn- jobs created are mostly new self employed or part time employment (think McDonalds) There is still severe under development in parts of the UK and the whole country basically relies on London to get the ball rolling. 4) There is a probability that Mark Carney himself might pull off a Janet Yellen- basically a 360 cowardly shift in policy because the BoE knows that deep down, QE has only spurred asset inflation in stocks and the property market ( how many of you have already bought a house in London) and any reduction in stimulus may create withdrawal syndromes So what does all of this spell for us? I think converting enough to last for 1 years worth of education should be safe. I see GBP trading at 1.60-1.70 to the USD next year In converting now, you should not be pedantic in fretting over a 50c difference etc. We have already tapered off slightly for the last 2 weeks and trust me, the technical patterns show that the bulls are still in charge-any catalyst that causes a specualtion on earlier rate hikes or if Carney shoots off his mouth, GBP parties like its 1999. The market has higher upside risk in the ST compared to downward potential. Hope this helps! ST:
Posted on: Wed, 23 Jul 2014 15:06:11 +0000
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