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GBP: Why Jason Sen sees strong rally but weak momentum?

The British Pound has been in a steady rally for at least a year now as the economy has been one of the better performers and speculation increases about the timing of the first interest rates rise. Let’s use this anniversary to look at some of the currency crosses. The Pound has performed very well against the Euro bottoming exactly a year ago at 1.1400 to achieve 1.2673 this week as you can see in the weekly chart below.

An even better tremendous performance has been seen with the rally against the US Dollar taking the pair from 1.4800 up to 1.7191 in the same time period.

The British holidaying abroad this summer in the USA & Europe are therefore enjoying 11-16% more spending power and looking at the charts there is no immediate indication that this trend is about to reverse. The picture against the Japanese Yen is not quite as positive with more of a sideways trend this year:

The trend has been more stable against the Australian Dollar since the sell off in the early part of this year.

However a quick look at the more recent headlines gives perhaps a less rosy outlook than you may imagine ’’Economic recovery not ‘firmly rooted’, warns Kenneth Clarke’’
‘’Economists despair at the lack of investment, and the low productivity that follows. If only, they lament, investment was nearer 20% than the current 11%. Maybe the UK could begin to build a more sustainable and profitable future.’’
‘’Wage growth has been steadily declining since the first quarter of this year.’’‘’Official figures on Tuesday showed the consumer prices index (CPI) measure of inflation rose unexpectedly in June to 1.9% from 1.5% a month earlier.’’
‘’Rising house prices and high levels of household debt could tip the UK back into recession if left unchecked, the Bank of England governor has warned.’’
London certainly relies heavily on Russian billionaires splashing their cash and even Cameron has had to talk tough this weekend after the shocking MH17 crash with the UK ‘ready’ to push for more sanctions and risking the flow of Roubles in to the economy.
At time of writing the Pound is showing no signs of reversing the bull trend but it is time for caution as we pause for breath in recent weeks. A correction could be seen as overdue with the Pound so severely overbought & the Scottish referendum looming. We at least need to be aware of the potential storm clouds gathering on the horizon in these summer months.
Jason Sen

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