British Pound Sterling Heads Sideways as Equity Markets Rally

Below are the spot exchange rates as of the last update:

Pound to euro exchange rate: Unchanged on a day-to-day basis at 1.2040.

Pound to US dollar exchange rate: 0.01 pct down at 1.6390.

Pound to Australian dollar rate: 0.36 pct higher at 1.8364.

Pound to New Zealand dollar: 0.2 pct higher at 1.9830.

PLEASE NOTE: The above quotes are taken from the inter-bank markets. Your bank will then affix their own discretionary spread when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more currency. Please learn more here.

Omer Esiner at Commonwealth Foreign Exchange touches on the real issue that will determine GBP direction for the remainder of this week:

"The British pound held within a relatively narrow range against the dollar overnight. The Bank of England meets this Wednesday and Thursday and is widely expected to keep monetary policy unchanged. There is growing speculation that the BOE could depart from tradition and release a statement at a meeting where no change to rates is made. The BOE could try to talk down rising rates and the pound by limiting speculation that it is moving closer to raising rates this year."

ICN Financial are neutral on GBP/USD in the short-term:

"The pair is attempting to stabilize above the minor key support level that was previously broken, but till now we didn’t prove stability above it. Therefore, we prefer to remain intraday neutral in the U.S. session."

The story of the afternoon is the strong showing in global equity markets spurred by news that the US trade deficit shrank to a four-year low in November, as crude‐oil imports decline and exports climbed to a record.

However, the British pound stays steady, awaiting further directions.

KBC Markets comment:

"Trading in the EUR/GBP cross rate was confined to a very tight sideways range just above the 0.8300 big figure. UK new car registrations showed a spectacularly strong +23.8% Y/Y rise, but the report was no big issue for currency trading. 

"Cable basically tracked the price swings in EUR/USD as there was little UK specific news."

As mentioned in earlier posts, the Bank of England MPC decision due on Thursday could throw up a surprise for Sterling should forward guidance be tampered with.

However, Stephen Gallo at BMO Capital does not see this month's meeting as offering any risk. As such the pound dollar exchange rate is forecasted to maintain a predictable range:

"We expect the 1.6375-1.6510 range in GBPUSD to continue generally containing price action this week.

"The odds of a policy shift as soon as this week are quite slim, but more macro-pru shifts are on the horizon. Macro-pru on the ‘up’, Financial Policy Committee (FPC) may have more influence than MPC in 1H 2014."

Nomura are backing sterling in 2014 on the basis that the Bank of England is likely to raise interest rates this year. Analyst Jens Nordvig says:

"Our view remains that the BoE will be the first major central bank to hike rates in this cycle, and a hike could come already in Q3 2014. This is substantially earlier than current market pricing (around Q1 2015), and suggests that the UK curve will remain under upward pressure if the data picture remains robust.

"We are currently long GBP through GBPCHF spot and short EURGBP (in put spreadform). We are sticking with this view as long as the data picture confirms our bias for an earlier BoE rate hike. That being said, it would be comforting to see better flow indicators, both in relation to FDI inflow and central bank interest in GBP."

More insights into non-commercial currency positioning that has seen a gradual increase in confidence in the British pound.

"Speculative GBP positioning as a percentage of open interest was increased from 7% to 11% as asset managers turned flat after maintaining short positions for almost three years." - George Saravelos at Deutsche Bank.

The latest data on speculative (non-commercial) currency market positioning issued by the CFTC shows net long GBP positions rose to their highest level since January 2013 in the week to December 31.

An analysis by Lloyds Bank Research does however point out that this positioning is not particularly high from a "big picture perspective," with net long positioning only in 87.4% of the maximum seen.

"The rise in UK short term yields into the end of the year provided plenty of support for the rise in GBP and the increase in positioning, but the softer tone to yields has transferred to a weaker pound early this year and is likely to mean positioning will have been reduced in next week’s numbers. The relatively modest level of GBP long positioning doesn’t suggest there is a danger of a major move lower from here as positions are squared," say Lloyds.

The euro is predicted to suffer further against the British pound. Analyst Ipek Ozkardeskaya at Swissquote Research reaffirms the stance that further declines for EUR/GBP lie ahead:

"EURGBP started the year with decent selling pressure. Trend and momentum indicators are steadily negative and the cross trades comfortably within the downtrend channel building since July 2013. We keep our bearish view for a daily close below 0.8400 and place our target level at 0.82626 (fibo 38.2% on 2011-2012 drop)."

The next major domestic hurdle for the British pound comes on Thursday with the first Bank of England MPC meeting of 2014. This could be an important meeting for markets, as hinted at by Bank of America Merrill Lynch analyst Nick Bate:

"The BoE has commented that as the unemployment rate approaches that threshold, it will likely set out some further views on the prospects for monetary policy beyond that point.

"Thus, while the exceptionally strong pace of job growth of late - surpassed only once in the last 40 years - seems likely to slow somewhat, the possibility that the unemployment rate could soon fall to close to 7% suggests the BoE may start considering the issue imminently. Its February Inflation Report might be the most opportune time to set out some more-detailed views on the issue, but it could potentially start to lay some groundwork with a statement alongside its monetary policy decision this week, in our view."

Lloyds Bank Research say movements in the UK gilt markets point to the possibility of a consolidation in pound exchange rates:

"The weaker than expected services PMI index yesterday had a big impact on the short end of the UK curve, with 2 year UK swap rates dropping 5bps on the day. Much of this decline was probably a result of the sharp move higher seen in the previous month rather than a major reinterpretation of the UK outlook, since although the services PMI index was lower, it is still at high enough levels to suggest strong underlying UK growth.

"Some press indications that the BoE may look to move the UK unemployment rate threshold lower may also have helped pull short end UK yields down. The net effect on GBP was nevertheless negligible, with GBP/USD bouncing strongly from the mid 1.63s and EUR/GBP little changed. However, the yield decline has put yield spreads more in line with the current level of GBP, and suggests we can see some consolidation around current levels."

For the GBP/EUR we have Eurozone inflation data to look forward to this morning.

"Preliminary Dec. CPI for the eurozone is surely the most important data point for the EUR today. Higher than consensus inflation numbers may amplify yesterday's strength in the EU unit, while a negative surprise would weigh on the EUR in the short term. Medium term we keep our recently expressed view: 1.35 in 1Q14 and 1.40 in 4Q14." - UniCredit Bank.

UniCredit Bank's snapshot for GBP this morning:

"Cable is likely to again struggle above 1.64, while EUR-GBP may stay firm around 0.83. No surprises are expected from the BoE on Thursday to spur heavier GBP buying for now."

The UK currency kicked off the week deep in the red with a below-par December Services PMI sinking the unit further.

However, Monday's trade was all about the recovery in sterling - the currency managed to claw its way back into contention through the course of the US session.

Today we would expect external factors to drive GBP owing to a lack of domestic data. Only Thursday brings with it anything of importance in the form of the January MPC decision at the Bank of England.