A BETTER WAY TO PLAY THE POUND RALLY

DIRECTOR OF CURRENCY RESEARCH, GFT

YESTERDAY’S UK GDP data must have impressed even the most ardent cable bulls after it came in at twice the market consensus, increasing to 0.8 per cent versus 0.4 per cent expected. Growth was strong across the board and overall, the third quarter GDP grew at 2.8 per cent on an annualised basis – its strongest in nearly three years. The news instantly sent sterling higher towards the $1.5900 figure. The conventional wisdom in the FX market is that the GDP report will prevent the Bank of England from even considering any extra QE for the time being. It is hard to argue with this and the cap on any further monetary stimulus should prove supportive for the pound.

Despite the latest optimism, I still believe the UK economy faces considerable challenges as we head into the final quarter of the year. Government austerity measures along with a moribund housing market are likely to weigh on consumer sentiment and temper growth into the year-end. The curious aspect of yesterday’s GDP report was how much at odds it was with other data points on the UK economic calendar. In October, the economy produced weak retail sales, trade and sentiment survey numbers. Therefore, while the pair has scope to run to $1.6000 I remain sceptical that the rally can extend much beyond that point.

Nevertheless, the benefit of the doubt must go to pound longs for now. If UK data shows further improvement over the coming weeks, sterling could stage a surprisingly strong rally forcing a reassessment from longer-term pound bears such as myself. In the meantime, a smarter way to play the pound rally may be through the euro-sterling cross. Having just returned from the continent I believe the market is grossly underestimating the negative economic impact of the latest political turmoil in France. As traders begin to appreciate the cost of last week’s strikes, the euro-sterling pair should see further downward pressure.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.