The market was distracted by somewhat stronger than expected UK data today, but as the bulk of the data is from the May cycle (earnings and payrolls/unemployment rate) and the only June number was a better than expected Jobless claims number, we have to search elsewhere for a driver of the sterling rally today off the new local lows.
The best explanation appears to be a monthly “Agents Summary” from the Bank of England that normally doesn’t even merit a mention in economic event risk calendars, but given the Brexit vote, perhaps took on added interest this time around.
It was released around the same time as the data this morning and suggests that the lending activity of British banks is continuing as normal and contains a number of other rather positive comments, even if concern levels are clearly higher.
This, in addition to strong global risk appetite lately, the BoE neglecting to cut rates at the most recent meeting, heavy short sterling speculative positioning, and the enormous M&A flow implications from Japan’s Softbank acquisition of the UK’s ARM Holdings (£24-plus billion) suggest that the risk of a squeeze on sterling shorts may be running high at the moment, at least in the near term.
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Source: Saxo Bank
Management and risk description
The risk to this trade is that risk appetite turns, this agents’ summary fails to generate further interest in sterling, and/or that the ECB meeting tomorrow triggers a euro rally, thus stopping out the trade.
EURGBP monthly chart:
Entry: short EURGBP in the 0.8350-75 area.
— Edited by Michael McKenna
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