BRITISH POUND (CABLE)

Great Britain remains a vigorous part of the global economy. Consider the fact that over
half of the profits coming from the Financial Times and London Stock Exchange (FTSE)
100 are profits from overseas activity. The British economy is intimately linked to global
trading patterns. The TWI of the pound as tracked by iBoxx® (see Table 7.7) shows that
the major trading partner is the Eurozone, followed by the United States.
This immediately suggests that in trading the pound, the EURGBP and the USDGBP
pairs would be the main pairs to trade. The British pound’s fundamental personality is
that it is more oriented to European economic events than the United States.
We can see in Figure 7.12 that 2006 was a key year showing increasing strength of
the pound as a currency that has underlying strength. In 2006, it broke the index number
of 100. We can also see that the pound is getting close to topping out in global strength,
and traders need to watch for a possible probing or trend break in its TWI, as we can see
in Figure 7.13.

The British economy at the end of 2006 was growing at its fastest rate over the previous
two years nearing 2/9 percent annualized GDP growth. The Bank of England (BOE),
in response to the hot British economy, raised rates in a surprise move in August 2006,
and raised rates again to 5.75 percent as of July 2007. These actions of the BOE show
that its policy on raising rates is very sensitive to data and that the central bank is not
ideological about it.

The key factor for traders to watch will be what the BOE does on interest rates.
As indicated in the section on fundamentals, housing continues to be a major component
of decisions of central banks. Figure 7.14 shows that the hot housing market
of Great Britain has not, as of this writing, experienced a downturn like the
United States.
With regard to inflation, the BOE’s target is 2 percent, and it is now at 2.7 percent,
which leads to significant pressure and expectations that interest rates will not
go down. But any data that shows a slowing of inflation would translate into a selling
of the pound. Beyond the critical components of interest rates and GDP, Great Britain
has unique economic challenges due to an increase in migration levels. The surge in
migration can affect inflation and employment levels in a variety of ways, and those
who watch and trade the pound must not ignore these aspects of fundamentals and
Great Britain.

FIGURE 7.14 House Prices (Percentage Changes from a Year Earlier).
(a) Lagged by two months to reflect the fact that the index is based on completions whereas the
lenders’ indices are based on mortgage approvals.
Sources: Reproduced with kind permission of Land Registry. The house prices data being used is
Crown copyright and is reproduced with the permission of Land Registry under delegated authority
from the Controller of HMSO.




By ABE COFNAS