Markets take a Shine to Pound Sterling as Sentiment Measures Improve

Pound Sterling is no longer the pariah of the global currency community it once was suggest data.

Having taken a drubbing since late 2015, the Pound has stabilised since reaching lows at 1.1983 against the Dollar on January 15 2017.

The steady sideways action in a broad range between 1.22 and 1.2650 since October is initself indicative of a potential bottoming.

However, for analysts at Lloyds Banking Commercial Banking there is another more instructive market that sheds light on sentiment towards Sterling.

The risk that markets are attaching to Sterling has fallen sharply and Lloyds have written to clients expressing “intrigue at the dynamics of the GBPUSD risk reversals in recent weeks.”

The bank notes that the 1-month, 3-month, 6-month and 1-year structures - which effectively represent the cost of GBPUSD calls relative to their equivalent puts, and are widely used as gauges of sentiment - have all rallied in favour of calls since mid-January.

“These moves have occurred in an environment that, to us, seems more conducive to the exact opposite,” says analyst Robin Wilkin who says he believes investors are starting to shift opinion on the Pound, for the better.

That said, it remains far too early to suggest the sentiment will equate to a recovery.

GBP/USD has declined from its 1.2706 high on 2-February down to test interim range support at 1.2400-1.2345, while key event risks – including the triggering of Article 50 and March’s FOMC meeting – that have potential to be GBP negative / USD positive are now in the market’s focus.

Indeed, we have just reported on research from analysts at SEB that suggests while the Pound is undervalued it still has further weakness to absorb.

Lloyds reckon though that the well-developed 1.20–1.28 range is likely to hold for the time being, aided by profit-taking at the lows (an entrenched short position remains prevalent in the market) and capped by pessimistic sentiment at the highs.

“This may be the first tentative sign that investors are slowly shifting their opinion on the hard-hit Pound,” says Wilkin.

Where Next for Sterling

The GBP/USD continues to trade a familiar range.

"The failure to break above 1.2500 leaves us trapped between support at 1.2410-1.2345 and 1.2500-1.2570 resistance. Momentum is also mid-range and given little on the data calendar, we look towards crosses, primarily EURGBP (0.8495-0.8505), for direction," says Wilkin.

The analyst argue a break of 1.2410-1.2380 opens 1.2350 and 1.2250. "A rally up through 1.2500/70 resistance is needed to suggest a broader move back to range highs".

Long term, Lloyds believe the decline that started back in 2007 at 2.1160 is close to completing with the move under 1.30. While it is unclear that 1.1491 was the major base, 1.15-1.08 is their ideal ultra-long term basing region.