The other day Trade Leader Alex Kazmarck offered his thoughts on GBP/USD, suggesting the pound was probably due for a retracement in the near future. While I don’t disagree with his view on cable, in light of the comments from Bank of England boss Carney last week as to the timing of eventual rate hikes by the central bank, it’s is worth taking a broader view of sterling. I start with EUR/GBP.
The thing which stands out for me on the weekly chart below is the recent turn up in the width of the Bollinger Bands. The Bands have gotten extremely narrow of late – more narrow than at any point in the last several years, as can be seen in the relative width line at the bottom of the chart. That is a set up for a market to see a rapid increase in volatility, usually as the result of a new trend.
Of specific interest to us right now where EUR/GBP is concerned is the way the Band Width has increased on the recent break of 0.8150. This tends to indicate confirmation of the move, suggesting we are at the outset of a new leg lower in the cross’s move down from last year’s peaks. With the market getting into the high trading density area down to about 0.8000, it would be no problem at all to imagine it slipping toward that latter level.
We also have an extremely narrow Band situation on the GBP/JPY. Here too the Bands have gotten more relatively narrow than has been the case at any point over the last several years. In this case, however, we haven’t year seen them start to widen out, which make sense since there hasn’t been any kind of range break yet.
Supportive of GBP/JPY moving higher again eventually is the price pattern. It has the look of a bull flag or pennant, both of which are generally seen as positive continuation patterns. This is generally supported by the fact that more of the trading has been toward the upper end of the consolidation area than the lower, indicating stronger buying pressure. There is also a modest bullish seasonal pattern to the cross this time of year.
Switching to GBP/AUD, we have a similar if slightly different scenario. Here the Bollingers have also gotten narrow, though not to the historical levels seen in the earlier crosses. A look at the price pattern on the weekly chart shows us shorter periods of consolidation, and in fact a recent break down from the one either side of about 1.85 that happened earlier this year.
Still, we do have relatively narrow Bands that are starting to widen out once more, as in the case of EUR/GBP. This is a potentially negative situation for sterling, as said expansion in the Bands is coming in conjunction with weakness in the cross. We have what is looking like a potential failed rally following the break down from the earlier consolidation, creating a lower high, lower low situation. The one positive element is the proximity of the highs from mid-2013 to act as support. They are not very far below the recent lows.
What that leaves us with is a key range for GBP/AUD of about 1.75 to 1.83. I think the way the market breaks from here will tell us the direction of the next major move.
So we have is a situation where the pound looks like it could yet make further gains against the euro and the yen, but might be set to lose ground against the Aussie. That fits a scenario where the markets perceive the latter to potentially benefit from a stronger global economy, but the former two to continue to lag because of lingering internal economic issues. Sterling thus occupies a middle ground.