The British pound has gone back and forth during the course of the trading session on Thursday as we continue to see a lot of noise. While we did break out to a fresh, new high initially, we turned right back around to show signs of exhaustion. The market will continue to see a lot of confusion, because quite frankly the Federal Reserve is now likely to become even more aggressive due to the fact that CPI came in so much stronger than anticipated. Adding more fuel to the fire is the fact that James Bullard, Gov. of the St. Louis Federal Reserve and a voting member of the FOMC, decided to say in an interview that he wants to see a 50 basis point hike right away, and perhaps as much as 100 basis points between now and July.
That should be US dollar positive in the short term, especially as we had seen interest rate expectations in the United States spike wildly, which of course is an area that has been closely watched over the last several months. As rates continue to go higher, it will continue to work against the value of risk assets in general, and that could come into play against the British pound. That being said, you should keep in mind that the Bank of England also is tightening, so this could be a very volatile pair to say the least.
All things been equal, this is probably the one currency that will put up a reasonable fight against the US dollar. After all, the Bank of England looks to be somewhat aggressive, so that of course could help mitigate some of the losses that it would otherwise find against the greenback. However, I think it is difficult to put a lot of money into this pair right now, simply because even though we have broken above the previous resistance barrier, there is still noise above and of course we have the possibility of rate hikes hanging over the head of anything not named “the US dollar.” While the Bank of England will probably hike rates again, they are not anywhere near as aggressive as the Federal Reserve at the moment. They may end up being, but right now things are tenuous at best so I would keep my position size about one third of my normal size.
