What?
The pound started last week trading close to 1.5500 to the dollar and stayed in a narrow range for most of the time. It rallied ever so slightly mid-week to about 1.5575 before selling off to a low of just below 1.5400 on Thursday. Late Friday it was trading around 1.5525.
Why?
John J. Hardy, head of FX strategy at Saxo Bank, said the pound was range-bound as traders were focusing on the weak Euro rather than the British currency. The pound and dollar were both relatively strong against the Euro all week. Risk appetite was generally weak, which usually favours the dollar. But, by early Friday trading in the US, risk appetite and asset prices were rebounding strongly and this pushed the dollar lower against the pound, among others.
Also, the pound got a bit of a boost when the Bank of England published the details of its “funding for lending” scheme, which promises to lend money to UK banks at very low rates, if they are extending credit to the economy.
What next?
“Even if the pound manages to stay in this range for the very short term, or even for the rest of the summer, I expect it to eventually head lower toward 1.50, on a likely disappointment over the effects of an eventual launch of a new quantitive easing programme by the US Federal Reserve -- which is already largely priced in -- and on weak global growth. The US [should] outperform most of the other major economies,” said Hardy.
What to do?
“I am generally in favour of the pound against the Euro. Against the dollar, I expect the action to be more muted. In the very short term, the outlook is uncertain, but if risk appetite eventually fades, as I expect it will soon or as we head into the fall, then the pound could test 1.500 or slightly lower. For the near term, I am looking at 1.5700 as an important resistance level and would prefer to either sell close to there or on a break back below the 1.5400 area,” Hardy said.
