Is the British Pound Headed to 2.10?

The CBI Industrial trends survey dropped back into negative territory in the month of July, yet the British pound continued to rally. Many people have argued that rate hike expectations have been behind the 1000 pip rally in the currency pair over the past month, but if that was truly the case, then the less hawkish voting record from the most recent monetary policy meeting and the weakness of recent economic data 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 the UK has its doors wide open. Both Chinese and Middle Eastern governments remember the blocked Dubai ports deal and CNOOC?s bid for Unocal, leaving the UK as their preferred investment destination. To read more on what this means for the British pound, see our Special Report.