GBPUSD Holding its Three-Month Range but for How Long?
>> Sep 20, 2009
GBPUSD Holding its Three-Month Range but for How Long?
The US dollar is a dangerous currency to deal with when looking for a position that requires stability. Over the past few weeks, the currency has been remarkably volatile but direction has only come in fits that have subsequently forced major technical levels to new lows for the greenback (and little follow through to boot).
 | How stable is the GBPUSD Range? • Levels to Watch: -Range Top: 1.6735 (Fib, Pivot) -Range Bottom: 1.6115 (Fibs, SMA, Trend) • While the US dollar has been under tremendous fundamental pressure over the past weeks and months for its record low lending rate; it has nonetheless managed to appreciate against its British counterpart. This pair shows us that carry interests aren’t the be-all-end-all for the entire market. With little yield to find in this pair and a UK economy that hasn’t quite turned from its recession, this pair can weather most risk storms. • Whereas the dollar has tumbled to new yearly lows against other major counterparts (the euro, yen, franc, Aussie dollar and others), GBPUSD has maintained a very consistent range formation. We are now approaching the bottom of a wedge formation a rising trend from May, Fib retracement and swing low early September are all around 1.61. Suggested Strategy • Long: It may stretch the viability for momentum, but entry orders are set to 1.6165. • Stop: Since we are looking specifically at a wedge formation, we will place a stop at 1.6065. To secure profit, move the stop on the second lot to breakeven when the first target hits. • Target: The first objective is one and a half times initial risk (150) at 1.6315. The second is 1.6500. |
Trading Tip – The US dollar is a dangerous currency to deal with when looking for a position that requires stability. Over the past few weeks, the currency has been remarkably volatile but direction has only come in fits that have subsequently forced major technical levels to new lows for the greenback (and little follow through to boot). GBPUSD has been a notable exception over the past few weeks. Whereas other pairs have overwhelmed their respective range boundaries, the sterling-based major has maintained the same pattern that has been developing since the beginning of June. Currently, a broad selloff in the pound is pushing GBPUSD to the bottom of a wedge pattern; and while this offers a reasonable floor to develop a position around, it is more important to take account of momentum and broader fundamental drivers for this setup. While it may be the case that selling pressure behind the dollar for the past few weeks has been checked by the weak sterling; the situation in a market-wide reversal for the battered currency could be very different. Timing and vigilance for the dollar are essential for this setup. The strategy laid out looks for an aggressive entry and exit that is set intentionally tight to keep with wedge pattern as well as prevent risk from getting out of hand. Beyond that, we will cancel any open orders by Tuesday (to avoid a building trend) or should the dollar stage a broad reversal in the opening days of the week.
Event Risk for the UK and US
UK – While the British currency maintains a relatively high yield through domestic market rates, most other fundamental factors suggest it is in even worse shape than the US dollar. Official growth numbers have yet to secure a reversal from the plunge into recession (much less climb towards positive expansion like many of the nation’s industrialized counterparts). The strain has become so great that the government has not been able to plan an exit from its stimulus efforts (for the banking sector and broader economy); and they now are forced to cut spending to balance the threat of a deeper recession against a capsized budget deficit. These two concerns will dominate for fundamental concern in the weeks ahead; and policy alterations and forecasts from officials are likely to do the most provoking. For this reason, the BoE minutes may be the most market moving event through the week. The other indicators scheduled for releaseare all tied into housing (Rightmove Prices, the Hometrack survey and BBA loans); but aren’t necessarily shocking.
US – Regular, economic indicators have had little influence on the US dollar in recent weeks; and that will likely remain the case in the days ahead. Dollar traders are primarily concerned with the currency’s role in the FX market as the steady return of risk appetite through the months and tumbling domestic rates in the US have put it in a very compromising position. For this reason, everyone trading the dollar should also watch the direction and pace of the benchmark equity indexes. A lesser impact can be seen coming from the economic calendar. The FOMC rate decision is due mid-week; but there is little chance that the benchmark rate will be changed. Yet, the statement can feed speculation for the eventual return of hawkish policy. Other releases will struggle for volatility.
Event Risk for the UK and US
UK – While the British currency maintains a relatively high yield through domestic market rates, most other fundamental factors suggest it is in even worse shape than the US dollar. Official growth numbers have yet to secure a reversal from the plunge into recession (much less climb towards positive expansion like many of the nation’s industrialized counterparts). The strain has become so great that the government has not been able to plan an exit from its stimulus efforts (for the banking sector and broader economy); and they now are forced to cut spending to balance the threat of a deeper recession against a capsized budget deficit. These two concerns will dominate for fundamental concern in the weeks ahead; and policy alterations and forecasts from officials are likely to do the most provoking. For this reason, the BoE minutes may be the most market moving event through the week. The other indicators scheduled for releaseare all tied into housing (Rightmove Prices, the Hometrack survey and BBA loans); but aren’t necessarily shocking.
US – Regular, economic indicators have had little influence on the US dollar in recent weeks; and that will likely remain the case in the days ahead. Dollar traders are primarily concerned with the currency’s role in the FX market as the steady return of risk appetite through the months and tumbling domestic rates in the US have put it in a very compromising position. For this reason, everyone trading the dollar should also watch the direction and pace of the benchmark equity indexes. A lesser impact can be seen coming from the economic calendar. The FOMC rate decision is due mid-week; but there is little chance that the benchmark rate will be changed. Yet, the statement can feed speculation for the eventual return of hawkish policy. Other releases will struggle for volatility.
Data for September 21 – September 28 | Data for September 21 – September 28 | |||
Date (GMT) | UK Economic Data | Date (GMT) | US Economic Data | |
Sep 20 | Rightmove House Prices (SEP) | Sep 21 | Leading Indicators (AUG) | |
Sep 23 | Bank of England Minutes | Sep 23 | FOMC Rate Decision | |
Sep 23 | BBA Loans for Home Purchases (AUG) | Sep 24 | Existing Home Sales (AUG) | |
Sep 27 | Hometrack Housing Survey (SEP) | Sep 25 | Durable Goods Orders (AUG) | |
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