GBP/USD is trading at the 1.31 handle, maintaining a safe distance from the lows of 1.3026 it reached last week. Support can be found at 1.3110 and resistance at 1.3230. To put things into proportion, cable was briefly above 1.36 quite recently.
What is behind this bounce? The main driver is the upwards revision of labor unit costs. The authorities had already announced that they made a mistake in the calculation, and revised the number to the upside on Monday: 2.4% instead of 1.6%. This is yet another indicator of inflation and inflationary pressures.
There is another obvious reason for anybody who has been in the markets for long enough: profit taking. Forex trading is never a one-way street and corrections are necessary.
Apart from the main driver and the obvious correction, there are other drivers. Credit is booming. This is not new, but the latest figures serve as another reason to raise rates and cool down borrowing. Such excessive lending can cause future debt issues and bubbles.
In addition, there is some calm on the political front. Prime Minister Theresa May managed to survive an attempt to oust her after the unimpressive performance at the Conservative Party Conference in Manchester.
Will these gains last? Not necessarily.
Brexit negotiations are still stuck and that could return to haunt the pound. Moreover, May’s current situation is of can be seen as a “ceasefire”. Her rivals, most notably Boris Johnson, are waiting for the next opportunity.
And, the main driver of the currency is still the central bank. Sure, Mark Carney and co. are set to raise rates on November 2nd, in their “Super Thursday” event. However, this may be a one-off event: undoing the Brexit-related rate cut of August 2016 and that’s it.
What do you think?
