British Pound Soars above GBP 1.71, Tracking £/$1.80 Forecast Despite Scottish Independence Risks

By: Nadeem_Walayat

The british pound soared above GBP 1.71 and as of writing is holding steady at around 1.705. The surge in sterling confounded many market analysts who had both been skeptical of the strength of the british economy as it continues to face head winds from a depressed Euro-zone and the chaos inducing risks that surround the forthcoming Scottish Independence referendum where the polls continue to trend in the direction of the Yes vote.

CNBC illustrates the prevailing bearishness just at the time sterling started to take off.

CNBC - 5th June - Sterling faces pressure as BoE holds rates

The Bank of England (BoE) left interest rates and its asset purchase target unchanged on Thursday, amid expectations from some analysts that sterling could be set for a fall.

As expected, the bank decided to hold off on adding to the £375 billion ($628 billion) of asset purchases it has unleashed over previous years and kept its main benchmark rate at a record low of 0.5 percent. Sterling remained relatively unchanged after initially rallying after better-than-expected house price data during the morning session. David Bloom, HSBC's global head of foreign exchange strategy, believes that many strategists are "completely wrong" in believing the currency could push higher from these levels.

An appreciation of the British pound appeared to stall in May and the currency likely to trend lower in the near term, according to some strategists. Bloom added that the current account deficit in the U.K. and the lack of earnings growth meant he was bearish on the currency.

Following sterling's strength the mainstream financial press was sent scrambling to look in their rear view mirrors for answers that coalesced around expectations for an much earlier BOE rate hike.

Wall Street Journal - The British pound traded at its highest level against the dollar since 2008 after Bank of England officials suggested over the past week that the timeline for raising U.K. interest rates could be shortened.

Bloomberg - The pound advanced to the strongest level in 5 1/2 years against the dollar this week as bets the Bank of England is moving closer to increasing its benchmark interest rate fueled demand for the U.K. currency.

British Pound Forecast 2014

My long standing forecast as of mid Feb is for the British Pound to target a strong trend higher to a target of £/$1.80 by year end REGARDLESS of the outcome of the Scottish Independence referendum as illustrated by the excerpt below -

14 Feb 2014 - British Pound GBP Trend Forecast 2014

A quick look at the long-term GBP chart clearly shows a market that is breaking out of a multi-year trading range of between GBP 1.63 and 1.49. Therefore despite the Scottish Independence vote looking set to introduce much volatility during 2014, the over riding strength is such that GBP breaking above £/$1.80 before the end of 2014 appears highly probable.

Therefore sterling traders and investors need to immunise themselves against the bearish rhetoric that they will be subject to during 2014 in the run up to the Scottish Referendum, its aftermath and then the frenzy surrounding the General Election, all of which will be taken as cues for a weaker sterling when instead the reality will be one of sterling grinding its way ever higher to at least £/$ 1.80 this year as it continues to discount a strong UK economy and and outright Conservative election victory in May 2015 as illustrated below -

In terms of the British Pound forecast for the Scottish Referendum, it implies that -

1. A Scots No vote will dissipate Independence / UK breakup uncertainty for several decades.

2. A Scots Yes vote will result in an Independent Scotland having far LESS influence over Sterling than Scotland has today.

Both of these outcomes will tend to reinforce Sterling in terms of discounting a long-term trend for a more robust sterling economy.

Source and comments: http://www.marketoracle.co.uk/Article46142.html

By Nadeem Walayat

http://www.marketoracle.co.uk

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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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