A pound of factors for the cable

By FXstreet.com | August 06, 2014 AAA

FXStreet (Moscow) - The weakness of the pound looks surprising, as just a couple of weeks ago the market was absolutely sure the BOE is on the tightening path. All the data screamed about the growing pace of the British recovery with the GDP reaching levels not seen from 2007, the Industrial Production being in uptrend from March, 2012 and the ILO Unemployment Rate slid to the lowest since March, 2009. However, there were three factors combined that put the currency under pressure.

First, and the key one – the pair was deeply overbought as investors priced in the possibility of earlier tightening from the BOE. For instance, in early June when the cable reached 1.7190 area, speculative long sterling positions according to the CFTC data neared highest level since 2007. The turnaround and profit-taking was inevitable.

Second, the recent releases from the UK are starting to raise doubts about the further pace of the British recovery. The series of disappointments from PMIs, Industrial Production, Trade data and even Retail Sales made the investors fear the growth has peaked, and will keep slowing in the near-term.

And third, the USD popularity is growing on the back of better than expected economic data with surprisingly strong GDP, and positive trend in labor market. The largely optimistic results from US earning season only support the view – the largest economy in the world is back on its feet.

However, the recent almost 400-pip slide of GBP/USD may be a sign that the first factor is out, and the pair is coming closer to oversold territory. It means that we need bad US data, or strong UK data to trigger the broad rally of the pound, and the coming week may bring such opportunities.

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