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FX comment: Sterling shorts run out of steam – for now

It was a strange week for sterling. Monday was touted as the first day of a full scale rout but today (Friday) sees cable not much lower than where it was at the end of last week. It looks like Monday might have been just the final blow-off of the 61.8% retracement of the 1.35-1.70 bounce. Price action from the base was chaotic, down two big figures and back up one in the space of 15 minutes.

Sterling also tested technical levels against the EUR, just falling short of early-December’s high of 0.9152 in EUR/GBP. Most commentators were predicting further sterling weakness to the election and beyond. They cited the lack of agreed fiscal policy within a hung parliament, the probability of a resumption of quantitative easing (QE2!), post-Greece contagion, hedging implications of Prudential’s purchase of AIG’s Asian business, and “Jim Rogers says so”.

An exception to the bandwagon boarders was Steve Pearson, G10 FX strategist at Bank of America Merrill Lynch. On Tuesday morning, while acknowledging that the Prudential deal could trigger the purchase of up to $20 billion, Pearson was the first to point out that, as it was likely that funding for the deal was accomplished with the help of (dollar-based) Asian sovereign wealth funds, “there will be a largely offsetting GBP demand from international investors”.

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