The strong UK Retail Sales this morning has driven sterling strongly higher. This move of 150 pips against the dollar is I believe a continuation of the positive run in recent weeks. I have been saying that I saw this correction on Cable as a pullback to the neckline of the base pattern and I see today’s move as revitalising the bulls. However it is not just against the dollar that sterling is breaking out. The economic data in recent weeks has managed to generate a strong bullish sentiment for sterling. Subsequently we are now seeing sterling breaking out against several major currencies and this move looks to be sustainable.
On balance, the UK economic data has been fairly positive in the past month. The disappointment of a dip in Q1 GDP to +0.5% is likely to be revised higher (in any case compared to the US the GDP for Q1 looks to have been fairly positive still, despite the disappointment). Furthermore, this week’s dip into deflation territory for the first time in over 50 years is also widely expected to be temporary, whilst average earnings growth rising strongly to +2.2% actually suggests the UK economy is in something of a sweet-spot currently. When you take into consideration the consistently falling unemployment (to 5.5%), the strong showing in industrial production which came in better than expected in addition to today’s positive retail sales reading, the data has been a positive for sterling recently.
The Bank of England Quarterly Inflation Report may have been a touch on the dovish side with a slight paring back of its growth forecasts. However, the MPC meeting minutes actually showed a slightly hawkish lean on the rate setting committee, with two members (again likely to be Weale and MacCafferty) on the brink of turning hawkish again, in addition to what the MPC sees as the removal of slack in the economy within a year, the prospects of a rate hike look to be fairly consistently looking towards Q1 or Q2 next year.
This is all driving strong moves on the sterling crosses, which are now testing (against the Aussie and the euro) and in some cases breaking (against the Japanese yen) some key levels.
GBP/AUD remains on a long term bull trend, however, today the gain of around 160 pips is breaking higher and is looking to test the crucial high of A$2.0024. Momentum indicators are strong and perhaps most importantly suggest that there is still upside potential in the recent move. That would suggest buying into any near term correction.
EUR/GBP has been in a sideways consolidation for the past couple of months, however with intraday pressure on the April low at £0.7107 today the sterling bulls look to be ready to grab control once more. Again, importantly, the momentum indicators (RSI and MACD lines) specifically show the recent range has unwound the momentum , but now the move looks set to resume with further downside potential. A test of the March low at £0.7010 looks likely now but there is little reason to suggest that this would be the end of such a move in the medium term.
GBP/JPY has been pushing strongly higher now since mid April and today we are seeing the breakout to levels not seen since September 2008. On a technical basis the move today is arguably a bull flag completion which implies a potential upside target of 193.50. Although momentum indicators are very strong, the only reservation for the near term is that the RSI is looking fairly stretched at almost 77, but any near term weakness looks likely to be used as a chance to buy now.