Pound to Rebound

Warren Takunda

Summary:

Short-term oversold signals suggest scope for a rebound, but a more durable recovery might have to wait for the end-November budget to pass (without incident).

"Historically, sterling tends to weaken heading into the Budget but sees relief thereafter," says Kiran Kowshik at Lombard Odier.

That pre-budget nervousness is certainly evident in the price action:

GBP/EUR fell to a two-year low at 1.1340 this week.

GBP/USD slipped below 1.33, extending recent losses.

Most GBP pairs posted notable declines, leaving sterling oversold on several time frames.

The short-term tactical bet

Oversold readings on the daily charts warn of waning downside momentum, opening the door to a rebound and consolidation.

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GBP/EUR daily chart – RSI in the lower panel hits 30, signalling oversold conditions.

But for a meaningful recovery to develop, the fundamental winds must change.

Understanding the pressure – and why the outlook is a little brighter

Sterling’s recovery would benefit if the recent repricing in Bank of England rate expectations runs its course and concerns around the November budget fade.

What happened this week?

Markets increased bets that the Bank of England can cut rates further and faster.

Why? Because the government is set to raise taxes, slowing economic momentum and helping bring inflation back toward 2.0% context.

Lower expected policy rates pull down short-term gilt yields, reducing foreign demand for GBP as global investors hunt higher returns elsewhere.

The readjustment runs its course

That adjustment, however, may be close to completion with money markets showing investors have priced in a realistic degree of additional cuts.

If you are budgeting for year-end flows, it can be smart to anchor expectations to the consensus outlook and cross-check with a live desk quote while liquidity is deep.

Also, the pound tends to recover after budgets

We're less than a month away from the budget which promises to be a difficult one. But, a lot of negativity is already accounted for, and we could see a "buy the fact" reaction.

Kiran Kowshik, Global FX Strategist at Lombard Odier: “Our cautious view on sterling was justified in the third quarter. Looking ahead, the UK Budget on 26 November is a key event risk, and markets are nervous about both too little fiscal consolidation and higher gilt issuance, and too much fiscal consolidation, which would allow the BoE to cut rates at a faster pace. Our view is that the rate path should matter more.Combined with renewed weakness in the USD, GBP/USD could see a more significant move higher heading into December if the UK Budget does not surprise market expectations. Our 12-month GBP/USD forecast stands at 1.37.”

Oversold technicals argue for a tactical rebound – and if BoE rate expectations stabilise and budget nerves fade, sterling has room to recover into year-end.

Source: Poundsterlinglive

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