I know, it’s hard to believe, but the British pound is coming back to life.
Just last week, we got the news that the U.K. could lose its AAA rating. However, one thing I’ve started to notice is that, as all of this bad news is pouring in, the pound seems to ignore it.
I’m not telling you the fundamentals have turned upward, because they haven’t. But currencies typically turn before their fundamentals do, in anticipation of a change that investors see coming in the months ahead.
However, there have been some upbeat notes from some key individuals this past week. For example, the comments from Bank of England’s David Blanchflower on May 21. He stated that he felt that their economy was about three-quarters of the way through their recession. If so, that means, buy the pound now before everyone realizes this.
Then Deputy Governor Charles Bean also stated that the “bottom in activity may not be far off.”
So it’s a good sign when these guys voice hopeful messages. They're typically not quick to speak. They tend to mull things over quite a bit before they say things. So when they talk like this, it’s a big deal.
Another reason that I feel that the worst is already priced into the pound is because it fell off more severely than many currencies. Now, I believe the sell-off that started almost a year ago is over.
I believe this because stocks have started to stabilize and volatility there has died down. When that starts to happen, it usually bodes well for the pound too, since investors tend to take on risk across the board among all of the markets.
The other reason I believe the pound is a great buy candidate is because it still has one of the highest inflation rates out there among the major industrialized nations. Year-over-year inflation is still at 2.3 percent. Only two other major countries have higher inflation, New Zealand and Australia.
Therefore, the U.K. may be among the first nations to have to raise interest rates once the coast is finally clear.
So, with such a beaten-down pound, that has factored in everything but nuclear war, and an inflation rate that is high still, it builds a great case for buying and holding the pound over the next several months to a year.
I know, many people will think I’m crazy for that opinion, but that’s okay.
Remember that the fundamentally bad news that you hear reported now is based off of the previous month-to-quarter data, and everyone knows it was bad then. So don’t wait until everything appears clear. If you do, by then all of the greatest value out of the pound will have already been long gone.
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