FX comment: Honeymoon is already over for sterling
Cable moved back up to 1.50 during the early part of the week but that hardly qualifies as a rally. The indications are that sterling is back in bear country.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ published a report Thursday calling for a further move down in GBP/USD to 1.3800. Halpenny is conscious that “the pound does look under-valued when analysed against other major floating currencies. However, the more extreme under-valuation is against commodity-based currencies rather than against the dollar.” The analysis seems largely to hinge on the relative gloom expressed in Wednesday’s Bank of England quarterly inflation report (QIR). Meanwhile, his comment on the coalition policy document is largely positive: “Both the Conservatives and the Lib Dems appear to have agreed on the need for a substantial package of austerity measures”, although one does wonder whether austerity or laxity would be worse for sterling in the short-term. Halpenny puts his stop at 1.5250.
Hans Redeker and Ian Stannard at BNP Paribas are also negative on sterling after the BoE’s report and they are more negative that Bank of Tokyo when it comes to the fiscal policy implications of the coalition, writing that there are: “fears that the Conservatives’ fiscal tightening plans are being watered down to accommodate Lib Dem policy demands.” Other negatives, such as the fall in the ILO’s employment figures and the break of what was believed to be “key support at the 1.4860”,