Pound crosses are continuing to shine brightly today as investors increase their expectations over an imminent interest rate hike in the UK. Governor Andrew Bailey warned the Bank of England "will have to act" over rising inflation at the weekend. Investors have bought the pound aggressively this week, suggesting they expect interest rates to rise very soon. Although Baily has acknowledged that monetary policy cannot solve supply-side problems, the BoE must try and tame inflation nonetheless, if policymakers see a risk “particularly to medium-term inflation and to medium-term inflation expectations."
Thanks to the renewed bullish momentum, traders are buying the pound across the board. I reckon sterling’s best gains will be observed against currencies where the central bank is still quite dovish, such as the yen and franc. Although the GBP/JPY has already risen sharply, the GBP/CHF
hasn’t made its move just yet and it appears to be just warming up. Like the Bank of Japan, the Swiss National Bank is nowhere near ready to tighten monetary policy. If anything, it continues to warn that the franc remains overvalued.
The GBP/CHF has been coiling for several months after the previous rally came to a halt in March. Now it appears like it is gearing up for another breakout, as price action continues to fail the bears (e.g. Monday’s inverted hammer saw no downside follow-through).
Meanwhile, the GBP/JPY
last week broke above long-term resistance around 156.00 as per the weekly chart:
The Guppy could now extend its rally significantly, but with the yen extended on the downside across the board, a bit of consolidation first would not be a bad thing.
Another pound cross catching my attention is the Chunnel. The EUR/GBP
has broken cleanly below the April low at 0.8470ish, potentially paving the way for a deeper drop in the weeks to come. This wouldn’t come as major surprise given the growing disparity between UK and Eurozone monetary policy:
Finally, let’s take a look at the GBP/USD
. The cable has broken its bearish trend line, but with the Fed also being hawkish, I wouldn’t be surprised if rates run into some resistance around 1.3850 area, where the 200-day average converges with the prior breakdown zone:
So, everything considered, the pound’s potential strength is going to come against weaker currencies and for me GBP/CHF could be the one to watch out for.