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By HaleStewart January 8, 2014 7:53 pm
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Time to Take Profits In the GBP/USD Trade?

Above is a chart of the GBP/USD.  The pound rallied from July to January, increasing in value by about 18.5%.  The reason for the pound’s rally was the increasing strength of the UK economy, while the US economy printed somewhat weaker numbers. 

However, over the last few months, the US numbers have been gaining strength.  3Q GDP’s final print was revised to 4.1% (although most analysts thing the 4Q number will be lower).  The last two ISM manufacturing numbers have been solid, with the anecdotal data points being especially encouraging.  The latest ADP jobs report number was solid.  And, most importantly, the Federal Reserve is now tapering, which should add to the dollar’s strength.

The main wildcard in this mix is the BOE’s policy.  While the UK economy has been printing stronger numbers, it’s still too early to think about raising rates.  But don’t be surprised if we do get a preliminary rate hike of 25 basis points in the next 6-9 months as the BOE tries to begin weaning the UK off lower rates.

Ultimately, what we have in the above chart is two economies that are now expanding.  As such, there isn't much to differentiate them in the pairing.  Compare that to the USD/JPY where one country is tightening and one is loosening.  That's simply an easier trade to see.

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