Chart Of The Day: Despite Bleak Outlook, Pound Sterling Set To Push Higher

 | Aug 19, 2020 10:13AM ET

After its economy slumped by 20.4% during the second quarter, some have been calling the UK “the sick man of Europe.” Indeed, it's the worst contraction on record for Britain, putting it in the deepest coronavirus fueled recession of any major global economy.

The Bank of England recently said the country is facing the worst recession in a century. That's an upward revision from its more dire, May prediction forecasting the worst economic crash in 300 years.

And yet, the pound sterling had its best quarter versus the US dollar in over a year, from April through June.

So what gives? Why would Cable outperform when its central bank is busy issuing ominous economic forecasts?

The pound started off from a much lower point because of a variety of woes related to the 2016 Brexit vote and continuing into the March COVID-19 selloff. All these factors contributed to the Cable falling harder than other major currencies—rendering it a bargain. As well, it was boosted by better-than-expected retail sales and services data, in addition to a reasonably good unemployment report.

The current, sharp dollar selloff also helped the ailing currency, plus Cable rose against both the dollar and the euro, as Brexit talks resumed, suggesting that some of the preceding downfall was just on Brexit woes, with any good news on that front rapidly priced-in by nimble traders.

Thus, a confluence of dynamics —relief at a lesser historic recession, better-than-expected data and progress on Brexit—appears to have removed shorts from the market, creating a short squeeze.

That reaction is more clearly visible on the technical chart.