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A week is a long time in politics, and the past week has been a long time for both politics and the pound.
More details are emerging over the Liability Driven Instruments (LDI) that resulted in the emergency intervention by the Bank of England. What is becoming clearer is that the size of the LDI market, equal to around 66 percent of the UK economy, was causing heavy selling of the pound to buy the dollar.
The proposed tax cuts by the UK government will probably go down in G7 history as the worst-ever timing for such a major policy shift, as it acted as a catalyst for more serious moves in the LDI market than had been expected.
However, now that much of the tax cuts have now been scrapped and the LDI-based liquidity crisis seems to have been averted for now, the buyers have returned to the pound – but can this continue?
The daily chart details how price action has only moved back to the upper end of the medium-term bearish trend. While the excesses of last week have been regained, doubts remain whether this can be the start of a new bullish leg higher.
Talk is increasing that the Fed, while attempting to talk tough, may only have one hike left in this cycle. Can this end the flow of dollar safe-haven buying?
The long-term trend has been so poor on the pound that we would still need to see moves up towards 1.2000 before we can start to feel more comfortable on the medium-term outlook. If the current sharp forecasted interest rate differentials do continue to ease this could allow price action to normalise back towards levels posted in H1.
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Please note that the presented content refers to the Oval group which contains two legal entities: Monecor (London) Limited authorised and regulated by the UK Financial Conduct Authority (FCA) with Financial Services register number 124721. Monecor (Europe) Limited authorised and licensed under the Cyprus Securities and Exchange Commission (‘CySEC’) with license number 096/08.