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Oct 04 - 07:55 AM

GBP/USD - COMMENT-It's Time To Cover Risk Of Enduring Sterling Weakness

By Jeremy Boulton  —  Oct 04 - 05:45 AM

With the pound having broken lower out of long-term trading ranges and likely to remain soft, the GBP/USD rebound from 1.0327 to 1.1428 offers traders the opportunity to hedge the risk of enduring sterling weakness.

The slump towards parity was unexpected, but the drop seen before that move wasn't.

It was largely the result of U.S. monetary policy, which drove GBP/USD down from 1.4250, when the Federal Reserve announced a taper in June last year, to 1.1257, before the UK government announced measures blamed for the following plunge.

GBP/USD is now trading above the levels that previously resulted from technical and fundamental drivers that are unchanged.

The rally looks overdone, and the probability of a drop is heightened by this seeming bullish overreaction.
GBP/USD is likely to fall and stay down, with a strong chance parity is tested.

The furore since the mini-budget has weakened the UK government, resulting in infighting over future measures, and has spurred changes in financial markets that make future BoE decisions much more difficult.

That is unlike the situation at the Federal Reserve, whose policymakers remain overtly hawkish.

Stock market rallies allow the U.S. central bank to maintain the tightening cycle, and should the simultaneous surge in oil prices fuel inflation, it might encourage policymakers to be more aggressive.

Bad gambling may drive EUR/USD to a fresh year-low.


For more click on FXBUZ


Source:
Refinitiv IFR Research/Market Commentary

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