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Forex Flash: GBP or not GBP, that is the question - Societe Generale

FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale believes that Shakespeare would be proud of Mervyn King, maybe.

He begins by noting that the power of the word has never been as strong as in a world that is fundamentally unstable and writes, “Valuations are at extremes, while the steady hand of long term money is into money markets rather than bonds. These vulnerabilities disappear in the mind of investors as the rush into risk continues driven by low yields and a cyclical recovery. Corrections are sharp but prove shallow. It is like riding a bicycle oscillating but reverting up along the mountain. The task of managing the road ahead is that of the Central bank, will it be a cliff or a ride down?”

In this underlying instability, he sees that the power of the word can be enough to move markets. The press and analysts had taken a mighty sword to the perceived BoE policy of currency debasement or at least of a rapid version of it, reminding all and sundry of the failure of such policies in past decades in the UK. However, he notes that Mervyn King finally reacted to such perception by boosting expectations of future growth and having what could be termed nicely a ‘strong’ GBP policy, which means please be so kind and keep it weak. He feels that with a market running on bearish fuel and economic surprises close to historical lows, GBP is being promptly squeezed higher. He writes, “I had presumed it would be mostly via EUR rather than USD. In a fairly consistent error, I underestimated the strength of the move (GBPUSD is rising too).”

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