Sterling, Short Sterling And A Near-Term Cap
Marc Chandler | May 15, 2014 12:07AM ET
This Great Graphic, created on Bloomberg, depicts the U.S. dollar against sterling, rather than sterling against the dollar, as normally quoted (yellow line) and the March 15 short-sterling futures contract (white line). Short-sterling futures are essentially the same as Eurodollar futures for dollars. That is to say, it is a contract for a three month deposit and the implied interest rate (100 minus the price). It is a three month interest rate that is very actively traded.
The chart shows the dollar trending lower against sterling. The short-sterling contract has been in a trading range for much of the year. However, more recently you can see that rates were ending higher and were at three month highs Tuesday as the recent strong data suggested that economic slack was being absorbed quicker than policy makers expected. This is one of the factors that helped fuel sterling's last leg up.
Yesterday, the short sterling futures contract rallied and the dollar firmed against sterling on a double whammy of disappointing wage data and a BOE pushing against speculation of a rate hike sooner than later. The "sooner or later" is in reference to whether it is before or after the May 2015 national elections.
Although we thought the Quarterly Inflation report and UK jobs data were going to be better, the disappointment has seen sterling near the target we suggested in our weekly technical note , $1.6730. Watch the $1.6800 area as a potential cap on near-term upticks.
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