‘Sheeple’ Following the GBPs Euro Rally
The GBP/EUR currency pair is trading at 1.1396, slightly off its 5-day high of 1.1425, but in line with the general trend. The sterling has been strengthening in recent days against the EUR, USD and others. Currency traders were concerned that the GBP/EUR pair would be moving towards parity, but the sterling has regained momentum and is now pushing towards 1.15921 – the 52-week high. Unfortunately, any indications of long-term bullishness against the EUR are unlikely to last. The momentum provided by the BOE helped to boost prospects for the Brexit-bullied sterling, but only for a short time.
If this is to be a pyrrhic victory for the GBP, it is worth considering what happened, and where the GBP is likely to move next. For starters, the GBP completely reversed course against the EUR after the BOE indicated that a rate hike would be forthcoming. Prominent members of the Bank of England, Gertjan Vlieghe and Mark Carney hinted at raising the interest rate when they met in mid-September.
MPC More Bullish?
The comments by MPC members are particularly encouraging for Sterling bulls. Note that the UK’s bank rate is at an historic low of 0.50%, and has been for quite some time. The Bank of England has embarked upon an aggressive policy of monetary easing to help facilitate spending in the UK.
Now that the latest UK inflation rate exceeds the growth in real wages by a long margin (2.9% versus 2.1%), talk of a rate hike is in the air. Both BOE governor Carney and Vlieghe are on the same page when it comes to this issue. It makes sense that the BOE would want to hike rates at this juncture: growth in real wages is declining, while CPI figures are increasing. Additionally, big-ticket item expenditure in the UK is also falling as people hold off on important purchases for fear of job losses or a downturn in the UK economy post-Brexit.
Presently, the Bank of England is adopting a data-driven policy in respect of interest rates. The Governor of the Bank of England typically fields the same position as the majority of MPC members – which has heretofore been against a rate hike (7:2 at the last meeting).
Precisely when the BOE will pull the trigger on interest rates remains uncertain. Some suggest that currency traders should prepare for a rate hike in November after the UKs inflation report is delivered. In the interim, we are seeing a high number of traders going long on the GBP. The biggest reason for weakness in the British currency is the Brexit uncertainty.
Brexit Blues Around the Corner?
From a high of 1.48 versus the USD pre-Brexit, the GBP has slowly clawed its way to a semblance of respectability at around 1.34 – 1.35. A caveat is in order: this may be the calm before the storm given all the Brexit-related pressures that are coming in the future. One must only look at the plans of major multinational corporations like Goldman Sachs, HSBC Holdings, automobile manufacturers, and other corporate entities which are now shifting assets around Europe.
The short-term prognosis for the GBP/EUR pair is bullish, and much the same is true for the GBP/USD pair. The sterling fared poorly against the EUR for several years since 2015. A slight reversal has taken place recently, but it is still early days. It remains unclear whether the current uptrend with the GBP/EUR and GBP/USD will last. Some analysts have gone long on the sterling, including Nordea Bank’s Andreas Larson who has adopted an exaggerated optimistic outlook.
As the GBP strengthens, inflation figures in the UK will calm, and additional rate hikes will be unlikely. For now, the prospects of a 25-basis point rate hike in November, or later are entirely possible, but this will more than likely be a once off hike, and not a trend. If Larson is correct in his assessment, traders and speculators who are going long on the pound are merely following the herd, a.k.a. Sheeple. The long-term prognosis hinges on the outcome of Brexit negotiations, and those are anything but optimistic.
What is your perspective on currency traders being referred to as Sheeple when trading the GBP? Do you believe that there is long-term hope for the sterling?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.