Sterling (GBP) continues to Drift lower – by- Michael Oyebamiji

Sterling (GBPUSD) has been on a 3 consecutive months of sell-off (November till date). Prices started dropping as high as 1.550 which was the October/November high. Since them the currency has dropped below 1.45O level.

In view of this development, a few factors can be attributed to this downward move on cable which broken the 2015 lows during the general election. We are now on a fresh low since 2009. The first factor which is responsible for this sell off is the weak economic outlook of UK economy especially low inflation. According to the Bank of England Governor, Inflation might remain low for quite a while owing to the falling energy prices. Inflation target by the Bank of England is 2%, recent figures by the office of National statistics (ONS) shows November inflation was 0.1%. This is a major factor responsible for weak Sterling.

Interest rate differential is another factor which might be responsible for a weak sterling. The Federal reserve Raised interest rate for the first time in almost a decade. This was a bold move by the Fed despite the fact that some sectors of the economy is still lagging. The Bank of England in contract is not showing any willingness to hike rate until late 2016 or early 2017. This is likely to be weighing down on Sterling as investors might see more value in holding USD rather than GBP at the moment.

Brexit is another factor which is creating some uncertainty in the UK. The prime Minister highlighted on Saturday during a TV talk show on BBC that UK referendum might kick off as early as summer. There is high uncertainty surrounding the Brexit from the European Union. Investors are unsure of the terms and conditions in relation to economic activities within the Euro Zone economic region if UK should exit the Euro Zone.  An exit will be bearish for Sterling in the short term.

Technically the price of cable has dropped from the 61.8 Fibonacci level which is also the support level at 1.480 the lows of 2013 and the support level at 1.455 2015 lows has also been broken. The next level to watch might be 1.428 which is the 2008 and 20190 lows. If price break this level, we might go all the way down to test the 88.6% Fibonacci level.

Fig 1:

The chart below is the monthly chart of Cable showing the support level to watch.