Currency set for best week since 2009 after BoE surprise

folarin okunola

July 15, 2016 5:45 PM

Many analysts have recommended selling any rallies in the pound in anticipation of cuts in Bank of England interest rates and a slowdown in growth in the months ahead, with a number of major banks predicting it will fall to $1.25 or lower.

Pounds Sterling

Expectations of a period of relative political and economic calm kept sterling on course for its best week since 2009 on Friday, although broader risks from last month's Brexit vote prevented a break past two-week highs above $1.34.

But the Bank shocked markets - and sent the pound up to 2 percent higher - by stopping short of cutting interest rates on Thursday as it awaits the first numbers on the economy taken since the June 23 referendum.

In a market already leaning massively against the pound, that points to a couple of weeks in which those betting on further weakness may be squeezed.

In early trade in London, sterling was up 0.2 percent at $1.3360, having earlier gained as much as 1 percent on the day. It was steady at 83.27 pence per euro.

"We think that extremely short positioning is going to play the dominant role in the next few weeks," said Valentin Marinov, Head of G10 FX research at Credit Agricole in London.

"Unless the data turns very, very weak in the coming weeks there is scope for further consolidation."

Eight out of the nine members of the BoE's monetary policy committee voted to keep rates on hold at 0.5 percent, wrong-footing the many investors who had expected a cut to blunt any immediate damage to economic activity from the Brexit vote.

Sterling forward interest rates, which had been pricing in a strong chance of a cut in rates to zero by September, now only fully price in a single quarter-point cut.

Sterling rose as high as $1.3480 after the BoE announcement, its strongest since June 30, and hit those levels again in overnight trade in Asia.

But traders said there would be strong resistance to a break above $1.35.

"I do think this rally is an opportunity to reload shorts," said a senior trader with one international bank in London. "Everyone's assumption is that there is a lot of bad news to come this year, so it does just seem like a matter of time before we go lower again."

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