Is the British Pound Headed To 2.10?

The slope of the rally in the British pound has been nothing short of impressive. Over the past month, the currency has appreciated from 1.9650 to 2.0650 (1000 pips) against the US dollar with virtually no retracement. Many people have argued that rate hike expectations are behind the move, but if that was truly the case, then the less hawkish voting record from the most recent monetary policy meeting should have put a dent into the currency pair?s rally.

But instead of doing so, the GBP/USD pressed forward, hitting a new 26 year high on a near daily basis. The interest rate curve has been mostly unchanged since the beginning of the year. If anything, the front end of the curve has become flatter. Even though 6 percent is still baked into the markets, the “real” driver of the latest wave of pound strength is merger and acquisition flow. Flush with cash, foreign governments are on a buying spree and theUK has its doors wide open.

Some people may have forgotten that over the past few years, the UK has been one of the biggest beneficiaries of US protectionism. Remember the Dubai Ports Deal and the CNOOC?s bid for Unocol? Both were blocked by the US government. In an environment where the US economy is just struggling to stay afloat amidst the problems in the sub-prime sector, US protectionism has contributed to dollar?s demise against the British pound.

[B]Qatar[/B][B] and China Both Investing Heavily into the UK[/B]
To the benefit of the British pound, Chinese and Middle Eastern investment funds have been snapping up companies left and right. Barclays PLC announced yesterday that the governments of China and Singapore have agreed to invest at least $3 billion and as much as $18.5 billion into one of the UK?s biggest banks. Last week, an investment fund controlled by the government of Qatar also made a $21.8 billion takeover of the British supermarket chain J Sainsbury PLC. Unlike the US, the UK has not stood in the way of any of these acquisitions. Earlier this year, a Dubai investment firm that is backed by the government also bought a major stake in HSBC holdings. With the reserves of China, Russia and other Middle Eastern countries continuing to grow, we do not expect this trend to end. Central banks are no longer just content with earning US treasury yields. They are hungry for high returns and are looking beyond fixed income assets.

[B]Germany?s Protectionism Will Also Benefit the UK[/B]

Germany has also recently joined the US in trying to restrict foreign investment. Last week, Chancellor Angela Merkel warned that foreign government backed investment funds may use their financial stakes to pursue political goals and as a result, she said Germany will be looking into ways to protect her industry from foreign investors. This is a sharp shift away from the comments that Merkel made at the Doha Trade Talks, where she backed free market principles. She urged other members of the European Union to limit foreign investment as well. All of these factors will only highlight the UK?s business friendly policies, making it the premiere destination for foreign investments. Back in 2006, merger and acquisition flow was exactly what shielded the British pound from falling despite a sharp deterioration in UK economic data. Foreign takeover of UK companies shot up 11 percent to 172 billion pounds in 2006 - the highest since the peak of the dotcom boom in 2000. Dubai International Capital is looking to invest as much as $10 billion into a US company and if that deal gets rejected as well, then even those who have not been watching the trend of cross border acquisition flow will be reminded that the US favors protectionism.

[B]Does this mean the GBP/USD is headed to 2.10?[/B]

Fundamentally, the market is still looking for 6 percent interest rates. The rise in the British pound and recent economic data suggests that even though rates could be raised again, the Bank of England will not be in a rush to do so. A rate hike may not come until the latter part of the fourth quarter but the fact that they have high and potentially growing interest rates will not stop the GBP/USD from rising further if acquisitions continue to grow.

Technically, according to today?s Daily Technicals by [I]Jamie Saettele, [/I]Wave 5 in the GBP/USD, which is the current up-trend, is not over yet. The level to watch is 2.0576. “[I]The pair continues to press against the resistance line drawn off of the June and July highs and RSI on the daily has been overbought since July 10. A drop below the line drawn off of the 7/6 and 7/13 lows would strongly suggest that a near term top is in place. That line is at 2.0576 today. Price above this line keeps the structure bullish.[/I]”[I] [/I]Just looking at a pure price chart, current price levels do serve as resistance dating back to 1981, but the most significant resistance is the psychologically important level of 2.10.

Source: FXTrek Intellicharts