New 3-year GBP/USD bear trend to develop? - SocGen

By FXstreet.com | Updated August 13, 2014 AAA

FXStreet (Bali) - Kit Juckes, Head of FX Strategy at Societe Generale, notes that the Sterling has been a very annoying currency, but is finally falling, and he expects now a 3-year GBP/USD bear trend to develop.

Key Quotes

"The combination of the softness of UK wage growth and the perception of dovishness from the Bank of England Governor’s comments at the Inflation Report press conference, have seen markets completely reverse the rate re-think Mr Carney prompted with his comments at the Mansion House in June. December 2014 short sterling is at its highest level since the morning of that event.” It could happen sooner than markets currently expect” was what he said on 12 June about the timing of the first rate hike. Well, markets listened, responded and have now listened some more and taken back their initial position. Forward micro-guidance has a slightly tarnished reputation and the pound has fallen."

"There’s a better visual fit between UK/US rate spreads and the GBP/USD rate than is the case for most currencies over a long period. The currency correlates better with the 2–year spread than with policy rates or bond yields, and has tended to correlate better in recent years than previously. A simple correlation of the move in the last 12 months shows a 1% rise in relative rates ‘drives’ a 33-figure move in GBP/USD, on which basis, the18bp narrowing in the 2-year rate differential since it peaked at the start of July is ‘worth’ almost 6 figures of GBP/USD, i.e., from a peak close to 1.72 to around 1.66. The move we saw today, held up at 1.67, is close enough not to argue with. From here, we expect a further slow fall in the months ahead, while on a longer-term view, we expect GBP/USD to head into the lower half of its 1.50-1.70 range."

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