Despite UK Prime Minister Theresa May’s best (*cough*) efforts to destroy confidence in her leadership at the Conservative party conference last week, the British pound has risen to become one of our preferred longs this month according to our currency checklist. (Remember UK readers, our old £1 coin will be retired from circulation from next Monday!)
We have been observing a number of notable reversals in our checklists recently. These typically correspond to major turning points and an emerging trend, although this is not always the case (wouldn’t it be great if it was!). Following varying signals in recent months, our checklist has turned firmly positive on British pound – indicating that investors should look to own sterling, and traders should generally avoid taking short setups.
Country analysis. A mix of green and red here this month, suggesting that on balance the improvement in some data points are being offset by deterioration in others. Exercising a little discretion, I would argue the case that as the realised data (‘LAST’) shows improvement exclusively, and the deterioration relates only to estimates, this could on balance be considered a small positive on our checklist.
Economic surprise. Given that the country analysis scorecard is barely positive, its perhaps to be expected that these data are barely moving the needle in terms of estimate surprise amongst economists. What this tells me is that forecasts are not wildly bullish, otherwise we would have seen a decline in the UK Citi Economic Surprise Index (UK CESI) on this weak positive momentum. So in conclusion, with the month-over-month change basically flat (+5.4), we consider this to be neutral in terms of our checklist.
Real interest rate. The UK real interest rate has improved in sterling’s favour this month, although the absolute level remains negative. We present this information each Monday in our weekly Market Report at the Academy, and present it here in a slightly different format to visualise the longer term trend and relative position. In terms of the marginal change only, this deserves a positive mark on our checklist.
Futures positioning. Speculators are still ‘net short’ GBP, but only barely. In fact, the lengthening (‘less short’) that has taken place recently sees positioning at a 52 week bullish extreme. This is a clear negative from our perspective as contrarians.
Technical analysis. Momentum appears positive, although at the time of producing the checklist (in advance of October), there were signs of the rally being overextended and prone to a temporary pullback. Mindful of this, we awarded a positive half mark for the technical profile of sterling.
Conclusion. In total we see a score of +1 for the pound heading in to October. This shows considerable improvement on September, and suggests approaching GBP from the long side over the coming month (i.e. short sellers should consider covering any positions, and longs may look for potential entry opportunities).
At the time of publication, the selling that we have seen so far this month makes this all the more interesting, and may provide a timely entry for establishing longs given the insights from our checklist. Of course, you should always do your own research, and may well decide to take the other side of this trade – after all, that’s what makes a market.
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