Pound for pound

Despite its volatility throughout 2006, the pound has actually posted a healthy rally. From the January low around $1.71, the pound soared to a high around $1.91 in early November. Expectations of the August 2006 BOE rate hike were a factor propelling the currency higher mid-year, along with stronger than expected economic growth readings.

“A more-rapid-than-anticipated rebound in the housing market and the turnaround in manufacturing all played a role in boosting the economic fundamentals for the UK,” Guest says. “This in turn supported the rationale for rate hikes and boosted the yield appeal of the pound.”

Most analysts see strong resistance around $1.91, with potential for modest weakness into 2007.

“The major leg of the rally in sterling has already occurred,” says Charmaine Buskas, economist at Moody’s Economy.com. “This is just the tail end of the rally. At best, the BOE has one more rate hike, but most likely not.”

Solin looked at the technical aspects of recent sterling trade and identified resistance around $1.93 and support at $1.8650.

“It looks like a rising wedge to me,” he says. For the euro, Solin identifies resistance at $1.29 and support at $1.24, which could easily confine trade for the next several months, he adds.