Why Is The Pound So Strong?

Cable rally continues
USDJPY takes out 107.50
Nikkei 0.55% Dax 0.47%
Oil $67/bbl
Gold $1341/oz.
Bitcoin $8107

Europe and Asia:
EUR GE CPI 0.4% vs. 0.4%

North America
USD U of M 9:45

The pound continued its winning ways in early London session trade rising to within a whisker of the 1.4300 level as it threatened to take out the post-Brexit highs.

We are frankly at a loss trying to explain the near vertical move over the past 24 hours, but it has all the signature characteristics of a vicious short squeeze precipitated by the break of a key support level in EURGBP.

For the better part of the past year, EURGBP has held the 8700 level support, but yesterday’s surprisingly dovish ECB minutes triggered a flurry of selling in the pair as the market started to factor in a rate hike from the BoE while assuming that the ECB will remain stationary well into 2019. The disparity in interest rate expectations spurred a bevy of selling in EURGBP and the pair is zeroing in on the key .8600 figure support – a level it hasn’t seen in more than a year.

All of this has fueled a vicious one-way move in cable, despite the fact that the latest UK economic data continues to disappoint and Brexit negotiations which are bogged down on the Irish border issues remain at an impasse. Clearly, the market is hoping that some sort of compromise on the Irish issue will be reached, but given the intractability of the problem, it’s difficult to see a path forward.

Despite the seeming disparity between price action and fundamentals, cable shorts should be careful. Short covering squeezes in the pair can be vicious and the price action may be communicating something that is not yet evident in the news. Given the moves over the past 24 hours chance a good that cable could run to post Brexit highs towards the 1.4400 level over the next few days.

In North America today the calendar remains quiet but the market will take an interest in U of M consumer sentiment data which has beaten expectations two months in a row and now hovers above the key 100.00 mark. Better sentiment reading could help USDJPY which has managed to absorb risk aversion flows on concerns over Syria conflict and retake the 107.50 level. Better consumer sentiment readings and stronger equities could drive the pair through the 108.00 level for the first time in two months.