Why The Pound Can Confound

Trading in the first half of the year was based on an improving US economy and Fed taper. That hasn't happened and US dollar lagged Thursday while cable led the way. We look at the underlying reasons for cable strength and preview the China Q3 GDP release up later. 

Many of the themes of the early part of the year reversed and converged Thursday. Earlier, Ashraf wrote about the change in fortunes in the euro. The US recovery was the main theme in Q1 and a potential double dip in the UK was another one. 

The consensus forecast for US growth this year is a measly 1.6%, that's about half of what many economists (and the Fed) were looking for at the start of the year. That could be revised even lower on the shutdown.

The consensus on UK growth is now 1.3%, a shade below to US growth. Through the first few months of the year there was plenty of talk about negative growth in the UK this year.

In politics, Cameron has been harsh and divisive but he's also been clear and decisive. US Congress has failed on virtually every level.

So it's no wonder cable has ripped higher over the last month and climbed another 200 pips on Thursday to 1.6160. The Fed continues to print and a taper in December or even January is now questionable. Meanwhile, if we see another dip in UK unemployment the BOE may consider abandoning its forward guidance or adjusting it.

The big anti-dollar trade on Thursday came as the market priced in no taper. Earlier in the month, traders were hesitant to bet against the dollar because the chance of disaster from Congress. The market will likely head into next week with a more balanced view and a focus on economic data.

As the week winds down, the top release is Chinese Q3 GDP at 0200 GMT. The consensus is for 7.8% y/y growth. At the same time, industrial production is expected up 10.2% y/y and retail sales up 13.5% y/y. The high-flying Australian dollar may be vulnerable to a snapback on any signs of disappointment.