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Sterling Rebounds, but Short-Term Outlook Remains Negative

H.S. Borji
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Sterling Rebounds, but Short-Term Outlook Remains Negative

The British pound rebounded on Wednesday, as a dearth of US economic data kept trade volumes relatively thin, while German consumer confidence suffered a setback.

The pound strengthened across the board, gaining ground on the US dollar, euro and Japanese yen.

The GBPUSD advanced 0.33 percent to 1.6596, easing off an intraday high of 1.6604. The pair has been capped below the 1.66 handle all week amid a steady stream of US data. The pair is likely supported at 1.6521. Initial resistance is located at 1.6615.

Sterling advanced further against the euro, as the EURGBP tumbled 0.23 percent to 0.7942. The pair, which has tumbled 0.8 percent since last Friday, gave up two intraday supports, with the next target likely found at 0.7939. On the upside, initial resistance is likely found at 0.7969.

In Eurozone data, German investor confidence unexpectedly tumbled, as global tensions resulted in the sharpest decline in economic expectations in more than three decades. The consumer confidence index, courtesy of the Nuremberg-based GfK group, declined 0.3 points to 8.6. Economists forecast a slight increase to 9.

The pound posted slight gains against its Japanese safe-haven counterpart, as the GBPUSD advanced 0.07 percent to 172.31. The pair is testing the 100-day simple moving average of 172.35. Initial support is likely found at 171.88 and resistance at 172.79.

The pound began to lose ground last month after it became clear the Bank of England wouldn’t raise interest rates this year. Persistently slow wage growth and signs the country’s economic expansion was cooling suggested central bank policy would remain highly accommodative until sometime next year. At the same time, a resurgent greenback placed downward pressure on the pound-to-dollar exchange rate, causing it to tumble 2.7 percent over the last two months.

The BOE slashed its wage growth forecast to 1.25 percent in its latest quarterly Inflation Report. However, the Bank upgraded its 2014 economic growth forecast to 3.5 percent from 3.4 percent.

Investors are debating whether the pound’s recent weakness is a trend reversal or as a temporary setback. The BOE is still on pace to raise interest rates before the US Federal Reserve, a move that is expected to make the pound more appealing in the long-run.

However, analysts warn the pound-to-dollar exchange rate probably isn’t the best guidepost for the pound’s future performance.

Monitoring trends in the pound-to-yen exchange rate is probably a better option for investors looking to gauge the UK currency’s potential future strength. The GBPJPY has been relatively stable the past few months, declining only 0.3 percent.
The pound had no major economic data to report on Wednesday.

GfK on Thursday will report on UK consumer confidence this month.

Hometrack will release its monthly report on UK house prices.

On Friday Nationwide will release a separate gauge of UK house prices.

The Office for National Statistics will close out the week with data on second quarter business investment. UK business investment is forecast to increase 2 percent in the April-June period, which translates into an annualized gain of 12.3 percent.

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