British Pound Highly Correlated to Housing

The British pound has been on a tear lately and part of the reason are the signs of recovery in the housing market. The following chart illustrates the close correlation between the trade weighted value of the GBP (white line) and the HBOS house price index (red line). The sharp increase in the HBOS suggests that we could see further gains in the GBP/USD.

The improvement has been so significant that many analysts are stressing the undervaluation of the British pound. According to a report by Citigroup, the British pound is one of the most undervalued major currencies. Some analysts even calling for a 20 percent rally in the pair. The more optimistic outlook is supported by recent improvements in the service and manufacturing PMI surveys.

Unlike other major currencies, the British pound could see sharper gains as long positions in the currency pair remain limited. According to the latest COT report, net short positions increased the British pound which indicates that traders are not long.

Graph: Bloomberg

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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