Pound too strong as BOE prepares for Carney era

Fibonacci Chart

The pound rose as high as $1.5752 on June 17, 0.2% from the $1.5789 resistance level that represents its 61.8% retracement of this year’s high and low based on a Fibonacci chart, data compiled by Bloomberg show.

Fibonacci retracement is named after a 12th century Italian mathematician and based on the theory that prices rise or fall by predictable amounts after reaching a high or low. In this and other forms of technical analysis, investors study charts of trading patterns and prices to predict changes in a currency, security or index.

“The evidence technically is that the pound is going to struggle to push through,” Richard Adcock, a technical strategist at UBS AG in London, said in a June 17 phone interview. “There will be correction to the downside again to unwind the upside extreme.”

Relative Strength

The pound’s 14-day relative strength index versus the dollar climbed to 69.6 on June 13 and was at 62.9 today, compared with the 70 level that indicates a currency has risen too far, too fast. When sterling breached the threshold in September, it started falling within a week, and during the following two months had tumbled 2.7%, data compiled by Bloomberg show.

Carney, who takes the helm of the BOE on July 1, said earlier this year that central banks aren’t “maxed out,” fueling speculation he’ll favor measures such as bond purchases. The minutes of the bank’s June 5-6 meeting published today showed that outgoing Governor Mervyn King lost his final policy vote, with officials blocking his bid for more stimulus.

The pound will weaken about 4.6% to $1.49 by the end of this year, according to the median estimate of analysts in a Bloomberg News survey.

Consumer prices in Europe’s third-biggest economy rose 2.7% last month from a year earlier, compared with a 2.4% increase in April, the Office for National Statistics in London said yesterday. Gross domestic grew 0.3% in the first quarter of this year, an official report confirmed May 23. That helped the pound climb versus 11 of the 16 most-traded currencies tracked by Bloomberg over the past month.

While growth has returned to Britain, its projected 0.9% expansion this year will be 1 percentage point slower than the U.S.’s, according to Bloomberg surveys of economists.

“There are question marks about how far this strength will continue,” Karen Jones, a London-based technical strategist at Commerzbank AG, said in a June 17 phone interview. “My core scenario is that we’ll see failure between here and $1.58. The longer-term trend remains bearish.”

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