As Cable edges up towards the mid 1.50`s it`s useful to take a bit of a step back and look at this mini bull run, from a detached point of view. Why this resurgence ?Well, you can count a slightly easier $ and a more optimistic feel about the UK economy as good reasons. I would throw one other pertinent factor in though, a lot of people that I know have been trying to play cable from the short side from the move through 1.50. Nothing wrong with that – apart from the fact that the coin came down the wrong side this time !
For the past 5 years or so, cable has mean reverted towards 1.50. It has spent time above 1.60, and a short time below 1.40, going back to 2009. It seems to me pretty obvious that over the years we are narowing down here to a pretty stable relationship. Previously, we discovered that 2.00 was wrong, and we found that 1.00 was wrong.
So, a 20 cent range – 1.40 to 1.60 – broadly speaking, looks like the future. That looks OK to me; governments love stability, and for exporters and importers, well both can live with those numbers, and they would also tell you that stability is their best friend as well. BUT, BUT, exchange rates always look at their most bid at the top and at their most offered at the bottom, so be prepared should we see 1.60 +, for cable to look very bid indeed – just beware of getting carried away – UNLESS there is a sea change in the underlying economic assumptions. One last thing I would add here, in my experience, in forex, whatever is least convenient to the UK government tends to happen. At the moment, with inflation something you will have to explain to your grandkids, and a worldwide push for weaker currencies, a continued stronger £/$ would not be first choice………
