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How much is the Pound?

The last BA protocol showed the same balance of opinions (7-2 in the favor of the current rates) and the complete absence of the common solution in regard to key issues; as the result - the market keeps pound under stable pressure. The publication of the information regarding the volumes of mortgage loans and Carney's planned appearance before the Treasury Committee of the Parliament planned for Tuesday can produce speculative response with a quick pullback.
In present-day conditions, any currency tries to become weaker against dollar, thus hoping to avoid deflation. Pound also supports that tendency. Besides that fact that the current statistics and the Bank of England meeting protocols did not add light in the obscure issue regarding rate increase dates, there are several more convincing reasons for continuation of sales.

The first reason is political. Pre-election attacks have begun. The UK Independence Party (UKIP), most likely, will not be able to get enough seats in the Parliament in May 2015; moreover, the other challengers are active adjusting their political goals. Even in the present Parliament, the party of the EU opponents have won one more seat by the results of the local additional election. Two rounds of the election may be arranged, and if Cameron loses, the new leader will obviously be a eurosceptic, which is, in the light of the upcoming 2017 referendum with regard to Britain's leaving the EU, will hardly please international investors.

The second reason is the discount rate. This year, pound has reached 1.70 level, since large capital counted on this increase, which is postponed for an indefinite period of time now. The expectations that were never met will put pressure on the rate at least until the end of 1 quarter of the next year.

The third reason – since 2009, Britain has not been able to close the growing deficit of the current account, and now it has reached 4.5% of GDP and poses a real threat of pound devaluation. The investors' inflation report brought disappointment promoting the idea that the economy was recovering faster than expected. And although certain growth of salaries does not cause any concerns yet, there is a risk that available production facilities will reduce production faster than it was planned for in the inflation plan for November. That can quickly lead to the inflation that is higher than 2% level comfortable for the Central Bank.

The following factor – high fiscal deficit, which is also on the level of 4.5-4.6% of GDP. The economic growth takes place in the midst of tax return reduction, since most of new jobs have salaries below the basic taxation level.

Reason No5 - slowing down of the economy growth rate. The positive dynamics of the beginning of the year is slowing down, the housing market declines, good unemployment statistics is followed by low productivity, which can be regarded as the consequence of the previous point. Labor productivity is not growing at all - neither hourly, nor in equivalent of jobs – it is still 20-22% below the values of 2008. The last BA protocol showed the same balance of opinions (7-2 in the favor of the current rates) and the complete absence of the common solution in regard to key issues; as the result - the market keeps pound under stable pressure. The publication of the information regarding the volumes of mortgage loans and Carney's planned appearance before the Treasury Committee of the Parliament planned for Tuesday can produce speculative response with a quick pullback.

So, if pound is actively sold:

  • Certainly - against dollar; moreover, FRS is preparing a rate increase. However, dollar purchases in the period of the financial rush can be dangerous, but until the above factors regarding pound are resolved, risking will be fully justified;
  • Since we can expect mid-term technical adjustment from euro, then we can expect the strengthening of cross rate EUR/GBP in the short-term;
  • In the light of the upcoming Swiss referendum and its unclear consequences, we can fully support the long position in the GBP/CHF cross rate;
  • Presently, a high demand for GBP/JPY is noted amid the present large interest - the Japanese currency is the traditional sale item of the British currency speculators.
However, it is worth being more cautious at the end of the year - massive fixation of short positions can provide some recovery.

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