The broad-based recovery in the pound sterling exchange rate complex has also impacted Russia's ruble which could give more of its 2016 gains if our analysis is correct.
Sterling appears to be hesitating after what has certainly been a strong month for the currency.
GBP reversed most of the early session losses as UK Q1 growth was in line with expectations, at 0.4% Q/Q and 2.1% Y/Y. Still, sterling gradually declined again later on against the euro and the dollar.
The positive sterling momentum of past days petered out but our analysis of the GBP to RUB charts suggests more upside could be on offer.
The GBP/RUB exchange rate, which is currently trading at 96.50, could soon appreciate to 99.00, as a chart reversal pattern threatens to up-end the down-trend in the pair, and Brexit related losses in sterling are recouped
Despite being in a strong, medium-term, down-trend, a double-bottom reversal pattern has formed on the daily chart of GBP/RUB as illustrated below:
Double-bottoms are ‘W’ shaped patterns which develop at the bottom of down-trends, signalling their end.
They are a classic but fairly reliable indicator of a reversal in the down-trend, resulting in the beginning g of a new up-trend.
The double-bottom on the pound to ruble is almost complete, with only a clear and decisive break above the top of the intervening peak at 97.096 necessary to confirm a reversal higher.
Following on from that we should witness a fairly rapid rise in the pair, up to a target of anywhere near 61.8% and 100% of the height of the pattern.
The existence of the monthly pivot, a formidable level watched by traders as a potential obstacle to further trend development, is situated at 99.008, providing a closer initial target for the pair.
Fundamental Risks on the Horizon
The pound is currently rising strongly in almost all its pairs as fears the UK will vote to leave the EU start to diminish.
UK high street betting companies are now placing the chance of the leave vote winning at between only 25-30%.
The intervention of Barak Obama and his suggestion that there might be a delay in formulating a trade pact with the US should the UK wish to go it alone, has been seen to further aid the ‘Remain’ camp vote, which has seen a rise over the last two weeks, since the official campaign began.
The more it seems like staying is a done deal, the higher the pound will rise, as it has lost a lot of ground due to previous fears that the UK would leave.
Some estimate GBP having lost 8% of its value solely on Brexit fears - losses which will rapidly be recouped in the event the UK stays in the EU, or even if in the run up polls begin to show an overwhelming majority wish to stay.
Russian Central Bank to meet
The ruble, however, also has the potential to rise, as a result of expectation the Central Bank of Russia (CBR) will keep rates on hold at its next rate meeting, rather than cutting them as had been previously forecast.
Rates had been expected to be cut as a result of a slow-down in the economy due to the rapid depreciation in the price of oil, a key commodity for Russia.
Governor Elvira Nabuillina has said that the economy, which is in a recession, needs lower interest rates, to keep borrowing costs down and spur growth.
Inflation in Russia is at 7-8% at the moment, which may seem high compared to the west, but is unseasonably low for the country, which is used to inflation of above 15% for months on end, such as happened in 2015.
Nevertheless, the central bank’s long-term aim is to reduce inflation to a 4% target, however, it has said it will put this goal on hold and lower interest rates in order to aid the recovery first.
The CBR rate meeting is on Friday 29, so there is the potential for some volatility after the announcement.
Rate Cut Expected in 2H
Danske see no chance of a cut at the CBR round-table, but do see a high probability of a cut by the end of the year.
“We believe a 50bp key rate cut is possible in early Q3 16. Otherwise, we believe any oil price weakening and deterioration of global risk sentiment would shift the cut into Q4 16. We still see the key rate falling to 9.5% by the end of 2016”, added Danske Bank.
Bank of America, meanwhile, expect a hawkish CBR response, which would strengthen the ruble, with a resulting rise in the short end of Russian sovereign yields:
“Sticky inflation expectations and a hawkish CBR however imply we favor the short end of the OFZ (Russian Government Bond) curve for now. Stronger gains are likely in 2H with CBR cuts.”
Oil on the Rise
The ruble is also strongly correlated with the price of oil, which remains in a technical up-trend despite arguments about the fundamental underpinning of such a rise.
One thing supporting the rally is that a large portion of the US shale gas supply has been shut down as unprofitable, reducing global supply.
The argument that Shale will come back online as soon as oil goes above 50$ a barrel, which is the price at which it is cost-effective to extract, has been contradicted by Resources Analyts Gourav Sodhi of intelligentinvestor.com, who argues fracking is capital intensive and therefore relies on a low interst rate environment, however, there are now multiple risks, both from oil prices going below 50 again and interest rates rising, which make many operations too risky to revive.