RSI shows Sterling is stretched

The pound’s having a terrible time of it lately. It’s been hard to find positives in recent data & last week’s UK retail sales miss compounded the negative bias, sending GBPUSD plunging down through support at 1.2980 and into the 1.26 area with little respite.

Why So Negative?

Sentiment can be summed up by this headline from a recent poll of economists: British cost of living crisis to have severe impact on economic growth.

Inflation has hit 30 year highs of 7% (and still might not have peaked). 22 economists were asked what impact the cost of living crisis would have on growth: 1 said it would be very severe, 17 said it would be severe, & only four said it would be mild.

The GfK consumer confidence index hit -38 last week. For context, the 2008 low was -39… Readings below -30 have led to recessions four out of five times. The measure of UK Household confidence in their finances over the next 12 months is also at record lows.

Compounding matters further, although the UK composite PMI headline of 57.6 was still comfortably in growth territory (and beat expectations), the accompanying commentary was not so positive:

New order growth at UK private sector firms decelerated to a greater extent than current business activity, according to the latest survey data. The overall rate of new business expansion eased to its weakest in 2022 to date, with both manufacturers and service providers recording slower recoveries in order books.

Survey respondents often cited subdued consumer demand due to squeezed household finances and rising prices for essential items. Similarly, business-to-business spending was hit by higher operating expenses, inflation concerns and geopolitical uncertainty.

Not a pretty picture. And all of this was reported before the retail sales miss, which looks like it could have been the final straw…

“When in doubt, zoom out”

If there’s any comfort for GBP bulls, cable has moved a long way in a short time. It’s way below the 20 & 200 day moving averages and now in oversold territory on the Relative Strength Index (RSI).

Positioning is already very short too. CFTC futures data released on Friday showed that funds had already built their largest bets against the pound in two and a half years: a net short position of 58,914 contracts.

The next Bank of England meeting (May 5th) will be key to watch. The MPC is widely expected to raise rates to 1%. At this level, the BOE has previously signalled that the central bank will consider outright bond sales. However, Governor Bailey recently said that the BOE would not sell gilts into “unstable” markets.

Markets will be keeping an eye on this for clarity, and any potential signals for further hikes ahead.

It’s not all doom and gloom for the U.K. A report published by the City of London Corporation showed that London was the number one city for foreign finance investment in 2021, attracting £600 million of investment into 114 financial and professional services projects.

Not investment advice. Past performance does not guarantee or predict future performance.