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Pound Too Strong as BOE Prepares for Carney Era

Pound Too Strong as BOE Prepares for Carney Era
The pound rallied about 5 percent from an almost three-year low of $1.4832 in March as Britain’s economy avoided an unprecedented triple-dip recession and inflation accelerated. Photographer: Simon Dawson/Bloomberg

The pound’s rally to a four-month high against the dollar is proving too much for currency traders unsure whether Mark Carney will step up stimulus efforts when he takes over as Bank of England governor next month.

Sterling’s failure to extend its advance after rising above its 200-day moving average on June 13 may be a signal its winning streak is ending, according to Barclays Plc. The pound is also approaching a key Fibonacci retracement level where sell orders tend to be clustered, while the stochastic oscillator crossed a threshold that implies an imminent reversal.

“We’re at a point where sterling is a bit stretched,” Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments Ltd., which oversees about $281 billion, said in a phone interview on June 17. “It could be pretty difficult to get beyond here in the near term.”

Dickson predicted the currency may fall to about $1.53 in two weeks, from $1.5480 at 4:12 p.m. in New York, after rising from $1.5009 on May 29.

The pound rallied about 5 percent from an almost three-year low of $1.4832 in March as Britain’s economy avoided an unprecedented triple-dip recession and inflation accelerated. While that suggests the Bank of England may pull back from stimulus measures that would debase the currency, Carney has said central banks can do more to aid growth, prompting analysts to forecast more weakness for the pound.

Historic Gains

Britain’s currency climbed above the 200-day moving average June 13 for the first time this year. When the pound surpassed that level in August and April 2012, it went on to gain as much as 3.9 percent during the following month, data compiled by Bloomberg show.

That the currency hasn’t appreciated this time means its advance may be exhausted, Barclays technical analysts including Jordan Kotick in New York wrote in a June 17 note.

“Lack of upside traction through the 200-day average near $1.5698 is helping to keep us bearish for sterling versus the dollar,” according to the analysts. A move below $1.5615 “would encourage our bearish view toward initial targets in the $1.5490 area,” they wrote.

The stochastic indicator for the pound versus the dollar was at 88 on June 17, before falling back to 57 yesterday, indicating a selloff. The signal measures the current price relative to the highest high and lowest low during a certain period to determine if a currency is overbought or oversold. When the gauge rises above 80, an oversold condition, and crosses below its moving average, traders consider it a bearish indicator.

Fibonacci Chart

The pound rose as high as $1.5752 on June 17, 0.2 percent from the $1.5789 resistance level that represents its 61.8 percent retracement of this year’s high and low based on a Fibonacci chart, data compiled by Bloomberg show.

Fibonacci retracement is named after a 12th century Italian mathematician and based on the theory that prices rise or fall by predictable amounts after reaching a high or low. In this and other forms of technical analysis, investors study charts of trading patterns and prices to predict changes in a currency, security or index.

“The evidence technically is that the pound is going to struggle to push through,” Richard Adcock, a technical strategist at UBS AG in London, said in a June 17 phone interview. “There will be correction to the downside again to unwind the upside extreme.”

Relative Strength

The pound’s 14-day relative strength index versus the dollar climbed to 69.6 on June 13 and was at 51 today, compared with the 70 level that indicates a currency has risen too far, too fast. When sterling breached the threshold in September, it started falling within a week, and during the following two months had tumbled 2.7 percent, data compiled by Bloomberg show.

Carney, who takes the helm of the BOE on July 1, said earlier this year that central banks aren’t “maxed out,” fueling speculation he’ll favor measures such as bond purchases. The minutes of the bank’s June 5-6 meeting published today showed that outgoing Governor Mervyn King lost his final policy vote, with officials blocking his bid for more stimulus.

It’s too soon to unwind policy that’s produced “unsustainably low” interest rates, King said in his annual Mansion House speech in London today. The bank has held its key interest rate at a record low of 0.5 percent since March 2009. A recent jump in bond yields shouldn’t be confused with a “return to normality,” King said.

The pound will weaken to $1.49 by the end of this year, according to the median estimate of analysts in a Bloomberg News survey.

Economic Data

Consumer prices in Europe’s third-biggest economy rose 2.7 percent last month from a year earlier, compared with a 2.4 percent increase in April, the Office for National Statistics in London said yesterday. Gross domestic grew 0.3 percent in the first quarter of this year, an official report confirmed May 23. That helped the pound climb versus 11 of the 16 most-traded currencies tracked by Bloomberg over the past month.

While growth has returned to Britain, its projected 0.9 percent expansion this year will be 1 percentage point slower than the U.S.’s, according to Bloomberg surveys of economists.

“There are question marks about how far this strength will continue,” Karen Jones, a London-based technical strategist at Commerzbank AG, said in a June 17 phone interview. “My core scenario is that we’ll see failure between here and $1.58. The longer-term trend remains bearish.”

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