There is one thing that can
be regarded as having the best chance of taking the British pound above the
strong resistance it has met in the form of the Monthly 200 period Simple
Moving Average (SMA), (illustrated
here), and that is a rise in UK interest rates.
The thing that is keeping UK interest
rates low at the moment is a flat inflation figure. The desire of the authorities
would be to increase inflation, not too much of course, but enough to dispel
any fear of deflation. And what keeps inflation low is spare capacity. The
classic way to illustrate the relationship between rising prices, which are
invariably driven by wage demands, and inflation, is the Pareto Efficiency curve.
In the diagram above, and
according to the traditional model as used by economists, a country might have
the desire to produce both guns and butter. If it is not fully efficient, in
other words if it is not at the limits of the curve in the diagram in terms of
its ability to utilize all its resources, it can choose to make more butter
even while it keeps gun production stable, because it has spare capacity and
all that is required is that it ups its levels of efficiency. However, if it is
at full capacity and cannot become any more efficient, it can only produce more
butter at the expense of making fewer guns. This happens when production effort
reaches the line of perfect efficiency in the diagram above.
It is therefore easy to see
how an economy working at full capacity can lead to inflation. Workers will
demand higher wages and can, in effect, choose whether they will be involved in
butter production or the manufacture of guns. Just as interest rates are a
primary driver of currency rates, wage demands are a major factor in the rise
or otherwise of inflation. And when inflation increases the authorities have an
incentive to raise rates.
This is the kind of analysis tool
we use here at OmiCronFX in order to inform our decisions on currency pairs.
There are many others of a similar nature.
Our positions
Gold
continues to perform for us and a reading through recent commentaries will show
the evolution of our position in the precious metal. The Aussie dollar is still defying gravity, but that is OK as we do not
hold a position as yet, and will not do so until the Mandelbrot routine
determines that it has started to fall in value, either against the US dollar or the New Zealand unit (NZD), or both.
Mandelbrot took us out of our
position in the Japanese Yen (USDJPY)
last night (GMT) as it was going nowhere and the Yen actually strengthened
(USDJPY went down), apparently in response to a falling Nikkei index. We have
entered a short position in EURGBP,
which is currently heading nicely in the right direction, and we watch GBPAUD in the belief that the Aussie
will eventually weaken while the pound will appreciate. Neither of these things
has happened as yet, however.
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