The British Pound has been rather resilient in its price action during the summer time. At the same time, the performance of the domestic economy has been rather lackluster. Nevertheless, the Pound has been able to largely hold on its own.
From a purely analytical standpoint, the Pound should have been trading significantly lower. The reason why it doesn’t has to do with investors’ consensus that a United Kingdom outside of the EU will remain a strong partner – definitely a weakened one but still a nation that can play a role in the broader European economy. However, even though the Pound has been able to remain afloat amid a bearish fundamental environment its outlook is capped by the negative prospects of the domestic economy. Most indicators suggest that the British economy is going through a challenging period; the uncertainty surrounding the EU exit deal and the future relationship between the two economies dampens expectations. Recently the Bank of England admitted that now is not to the time to think about raising rates. As such, any expectations for support to the Pound from the BoE is now off the table and the price action of the currency will largely depend on the macroeconomics and the performance of the other major currencies.
At a time when the Dollar is under pressure from geopolitical factors, a lack of progress in the US economy and constant political turmoil the Pound has the chance to over-perform against the greenback. At the time of typing Cable was trading just shy of its 1.32 yearly highs and should the under-performance of the Dollar continue technical studies suggest that if Sterling clears this resistance it could go all the way to the 1.35 area.
Contrary to the Dollar, the Euro has been on the upside following ECB’s intention to start tapering their asset purchases program and the Single currency has gained significantly versus the Pound. However, with Euro longs near record levels a correction might be due given investors’ extreme positioning. This wouldn’t change the outlook for the EUR/GBP cross but it could present traders with a short-term opportunity, especially if the Euro starts seeing some corrective action with the 0.90 area coming into focus.