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Will The Pound Bounce Back In 2017?

Will The Pound Bounce Back In 2017?

This is a great article about the pound below.

The pound is going to be one of those currencies to watch over the next few months & during the 2017 year. I mentioned that it will either break out of the range to the upside or the downside – against the USD.

As of today the GBP has shown strength against many of the other pairs but the intra-day 4hr chart shows many of those pairs now turning over – meaning the GBP is starting to sell off, which is natural after a currency pair has been increasing in value.

It is not in a trend at the moment against the USD but channeling – price moves between a channel – when it reaches the channel top it sells off and when it reaches the channel bottom buyers enter the market.

This is when traders make huge gains. Its now just a matter of waiting.

The French election will also put pressure on the EURO should Le Penn win the election.

Analysts at Barclays believe that sterling will hit $1.32 by the end of this year and rebound to $1.38 against the dollar within 12 months Credit: 

Sterling will climb back to levels not seen since the Brexit vote by the start of next year, according to analysts who believe the currency is “significantly undervalued”.

Oxford Economics said the pound was undervalued “on a wide range of valuation metrics”, while analysts at Barclays said on one measure sterling had only been cheaper against a basket of currencies during the depths of the financial crisis and the International Monetary Fund’s UK bail-out in the 1970s.

Barclays, Nomura and Citi said near record bets against sterling would start to unwind if the initial constructive tone adopted by the UK and Brussels continued over Brexit negotiations and US president Donald Trump faced further hurdles implementing reforms.

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Sterling net short positions are close to a record high. Source: CFTC, Bloomberg

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Chart type: line chart.
line with 260 data points.
The chart has 1 X axis displaying values.
The chart has 1 Y axis displaying Sterling net short positions.

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Sterling net short positionsSterling net short positions are close to a record highSource: CFTC, Bloomberg20132014201520162017-150k-100k-50k050k100kHighcharts.com

Data published by the Commodity Futures Trading Commission last week showed speculative net sterling short positions stood at 104,075 contracts at the end of March, close to the previous week’s record high.

“To be that short when you’re this cheap seems like a mistake to me,” said Marvin Barth, global head of foreign exchange at Barclays.

Analysts at Barclays believe that sterling will hit $1.32 by the end of this year and rebound to $1.38 against the dollar within 12 months.

Political risks in Europe mean the pound will also climb back to its pre-referendum level against the euro of €1.30 by the start of next year, they said.

Nomura believes the pound is up to 25pc undervalued against the dollar, adjusted for price differences and buying power, though it said a range of economic factors suggest this undervaluation “should sustain” for the forseeable future.

The pound plunged against a range of currencies following the Brexit vote, falling from around $1.45 against the dollar to lows not seen since 1985.

However, sterling posted its first quarterly gain against dollar since June 2015 in the first quarter, closing at $1.2542.

“We expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in sterling from historic undervaluation as ambiguity over Brexit recedes”, said Mr Barth.

Oxford Economics also believes the pound will rise to $1.32 against the dollar by the end of the year, and $1.35 in 2018.

“We see risks of an overshoot to our forecast in the intervening period,” said Martin Beck, lead economist at the consultancy.

“There is more than a reasonable chance that pragmatism will prevail and cliff-edges will be avoided given the potential costs to both sides if no agreement is reached.”

Blackrock, the world’s largest asset manager, has retained a long position in sterling. The plunge in the pound’s value in the wake of the vote has also helped to narrow the UK’s current account deficit, which halved at the end of last year.

Analysts said the marked narrowing, which was partly due to a rise in earnings on overseas investments, also suggest the pound is undervalued.

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Britain’s current account deficit narrowed sharply at the end of last year. Source: ONS

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Chart type: Combination chart.
The chart has 1 X axis displaying categories.
The chart has 1 Y axis displaying Current account as a % of GDP.

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Current account as a % of GDPBritain’s current account deficit narrowed sharply at theend of last yearSource: ONSTotal primary incomeTotal secondary incomeTrade in servicesTrade in goodsCurrent Account2014 Q12014 Q22014 Q32014 Q42015 Q12015 Q22015 Q32015 Q42016 Q12016 Q22016 Q32016 Q4-15-10-50510Highcharts.com

David Page, senior economist at AXA Investment Managers, said the improvement in the UK’s current account balance, which measures the difference between money flowing in and out of the UK through trade, investment income and transfers to bodies such as the EU, “should limit downside appetite for the pound even as we expect negative headlines from preliminary EU negotiations to mount”.

Analysts also said a short-term rebound in sterling this month was likely.

BoAML
Strong sterling April seasonals may be inherited from a weak dollar and strong oil, Bank of America Merrill Lynch said Credit: BoAML

Sterling has climbed against the dollar in April for the last 12 years amid a fall in US Treasury issuance, traditionally stronger demand for crude oil as refineries reopen after maintenance shutdowns, and an influx of foreign capital into the FTSE 100’s commodity giants, pushing up sterling demand.

Analysts at Citi said if the pound climbed to $1.2735 against the dollar this “could trigger a move to [around] $1.34 to $1.35, especially with a significant net short position remaining in sterling.”

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