The Pound Sterling Rally Will Fizzle say RBS; GBP the Beneficiary of 'a Summer boomlet'
A good summer
The British Pound Sterling (Currency:GBP) has enjoyed a good summer. A look at the performance of Sterling since July the 31st shows:
The Pound to Euro exchange rate has rallied 3.84 pct to reach 1.1933 from 1.1434.
The Pound to US Dollar exchange rate has rallied 4.17 pct to reach 15947 from 1.5252.
The Pound to Australian Dollar rate has risen 2 pct to reach 1.7030 from 1.693.
PS: The above quotes are wholesale; your bank will charge a discretionary spread when passing on their retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please find out more here.
A Boomlet - UK currency's rally will stall
Paul Robson at RBS is not convinced about the durability of the Sterling rally:
"For GBP more generally, the key question is whether the UK recovery is durable. Much is being made of the housing market recovery. However, only prices are really going up rather than activity levels. Activity levels and secured credit growth are still weak and there remains a London/overseas bias.
"Household balance sheets continue to look fragile and income growth remains weak. The test will be what happens when base effects soften and compensation payments from the financial sector ease.
"For now, we continue to believe that the recovery is just a Summer boomlet, more barbecues than widgets, and this leaves us expecting GBP's rally to soon exhaust."
Pound's rally against the US Dollar is overdone… or is it?
Stephen Gallo at BMO Capital Markets does believe the current rally may have overextended, however there could be more upside potential:
"A simple glance at the recent move higher in GBP/USD, taken alongside the change in net speculative positioning, would appear to suggest that the rally in the pair is overdone. 
"However, the anecdotal evidence suggests that real official money participants have probably been a very important force on the bid side of late, whilst systematic funds are still largely quite short of the GBP.
"Moreover, what the IMM data tell us is that long positioning in the GBP has not increased in a major way yet, suggesting that a large chunk of the move higher in GBP/USD has been a result of some segments of the leveraged money community cutting shorts, but not necessarily opening new longs to the same degree.
"Capitulation on the systematic side of the speculative community alongside additional positive UK macro economic data could in fact mean further upside in GBP/USD is likely before the cycle turns."
Will the Bank of England talk down the British Pound Sterling?
BoE Governor Carney decided not to talk down market interest rates during his testimony to the House of Commons Treasury Select Committee last week.
Robson says the British Pound is doing much of the tightening the Bank of England would normally be tasked with delivering:
"Having also not taken the opportunity on two previous occasions to guide rates lower, it seems that the MPC has on balance become more comfortable with the continued rise in market interest rates following the recent improvement in high frequency data.
"The bank's communication strategy appears under considerable pressure as forward guidance is about making sure that interest rate expectations do not rise at the first hint of economic recovery.
"While households appear to have bought into the idea that interest rates are on hold for the next two years at least, financial markets are far less sure. While this is most obviously seen in higher market interest rates, GBP's continued rise also plays to the same view.
"Together, they mean that monetary conditions are tightening quickly. While Carney has said that the UK can't devalue its way out of recession, the central bank will not be able to ignore the tightening in monetary conditions."