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Turbulent times for the Sterling

The pound has recently visited the area around 1.5555/50, printing annual lows, and at the same time and reminding investors of levels last seen in August 2012, when GBP/USD was on its way from 2012 lows around 1.5270 to late September highs above 1.63.

… No light at the end of the tunnel, yet

A major breakeven point for GBP undoubtedly was January ECB statement, where outflows from the quasi-safe haven has started to accelerate towards the euro zone, boosted by the optimistic vision of the ECB’s Draghi.

In addition, GBP traders now face the likeliness that the BoE may resume its easing cycle sooner than later, as the Funding for Lending Scheme is proving to be efficient, albeit slow in bringing about help to spark a sustained recovery in the British economy. Furthermore, inflation figures are set to remain over the 2.0% target for the next two years. This, coupled with the preference by the future BoE Governor Carney for flexible inflation targets to dictate the monetary policy, would prompt investors to think that there is more stimulus in the pipeline.

Another ongoing debate comes from the British exports sector and its bias towards a weaker pound in order to boost the sector and thus spills its effects over the rest of the economy. A point of view that is always on the cards, but not presently discussed.

The specter of a triple-dip recession in the UK is still hovering over the market participants, and a confirmation of such prospects would intensify the outflows from GBP. While this seems to be just a matter of statistics at the moment, monetary authorities could well decide to start acting and pump more liquidity into the system, as time is of the essence.

In addition, although extending the horizon further, an exit from the EU would also be a source of weakness for the sterling, but this will have to wait still a couple of years, and PM D.Cameron needs to come victor in the next elections to materialize his wishes of a referendum.

It’s all pointing south near term for the sterling so far, where the next big levels lie at the psychological mark at 1.5500, ahead of July 2012 lows around 1.5415 and then 1.5269, the 2012 lows.

Karen Jones, Head of FICC Technical Analysis at Commerzbank commented, “GBP/USD has eroded the 1.5642 2009-2013 uptrend – HOWEVER is yet to close below here and we suspect the market will rally towards its 20 day ma at 1.5768 ahead of further losses”.

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