GBP: Battle of the Central Banks

By: Richard_Cox

Since the beginning of April, we have seen some relatively strong upside moves in the British Pound (GBP).  For many, these moves were surprising, given the massive declines that were posted by the currency in 2014.  But all of us with experience in the financial markets know that no single trend can last forever, no matter how strong the technical or fundamental basis for the initial reasoning.  This turned out to be the case for the GBP over the last few weeks and we have now seen the GBP/USD overcome important psychological levels just above the 1.5750 mark.

So if we are looking to make long-term investments in the regional economy or its currency, it is first important to assess what is likely to happen at the Bank of England with regard to its interest rate policy.  This is important because, from a relatively perspective, the BoE could be slowing down in its commentary to potentially normalize interest rate policy and this presents some stark contrasts with what is being seen at the US Federal Reserve. 

For the GBP/USD, this is important because it could hinder gains.  But for stocks, this poses some interesting opportunities.  According to recent reports from MediaGroup London, we have started to see a rise in digital advertising revenues that tend to be associated with stock rallies on the larger indices.  If this turns out to be true, stocks could have this contribute to a dual positive of improved revenues and lower macro rate costs and this could be something that propels rallies into the second half of this year.

So when we are looking at the battle of the central banks, it now appears as though the GBP could suffer if we don't start to see a substantive rise in inflationary consumer pressures.  This is likely the only thing that could turn the BoE’s hand in the short term.  If the Federal Reserve does make good in its intentions to raise rates, we will more than likely see a surge in the greenback that will put added pressure on the GBP.  This does not mean that investments in the region should be avoided, but it does mean that investors will need to select their asset classes carefully if we see more of the same rhetoric from these two central banks.  Initial support in the GBP/USD rests at 1.5250 and a downside break here would likely trip many stop losses for longs that were looking for another test of the highs.

By Richard Cox

© 2015 Richard Cox - All Rights Reserved

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