Currency traders haven’t been this upbeat on the pound in more than three years.
The cost of owning one-month call options on sterling relative to puts reached six basis points, the steepest since February 2014, as the Bank of England said the market is underpricing the prospect of rate increases.
The premium on calls shows the market’s conviction that the currency’s more than 3 percent rally against the dollar this month has legs.
The key question on investors’ minds at the moment is: where does the pound go from here? To some extent, the currency’s fortunes against the dollar will be influenced by what the Federal Reserve does, and in this context next week’s FOMC meeting will take on added significance. Witness also that stronger-than-estimated consumer-price inflation data out of the U.S. on Thursday failed to damp bullish sentiment for the pound.
The Pound has the clearest signs of base formation completion against the Dollar not least because the Dollar has been so weak since early January. It is now breaking up out of a first step above the type-2 base and a clear downward dynamic would be required to question medium-term scope for some additional upside.
An impressive short covering rally is underway against the Euro but a sustained move above the trend mean will be required to confirm a change of trend beyond a reversionary move.
Meanwhile the strength of the Pound is weighing on the stock market with both the FTSE-100 and FTSE-350 pulling back to test the region of their respective trend means while the AIM 100 appears likely to unwind is overbought condition relative it 200-day MA.
10-year Gilt yields continue to firm from the psychological 1% area for the third time since April. A sustained move below that level would be required to question an evolving pattern of supply dominance.