Tag Archives: GBP/USD

Trade Leader Or Kahana presents analysis of the GBP/USD.

The GBP/USD monthly chart is at a crossroads, it could embark on a downtrend if the price breaks the flag (marked in green) or an uptrend if it breaks above the right triangle (as shown in pink).

If the price breaks below the bottom line of the flag (1.3503) and posts a daily close below this support level we will know we are heading down.  A decline of approximately 3,000 pips is expected, the amount of pips of the flag pole. There are a couple of things you must note before taking the trade. This is a monthly pattern. It could last more than one month before reaching the final target (1.0408, as marked in blue). Naturally, there may be corrective gains during the expected downtrend but the weakness is expected to be significantly stronger.

Bearish Flag or Bullish Triangle on GBP/USD

If a daily zero line reject or Vegas for short is parallel to the daily candlestick which is closing below 1.3503, I will join the trade right away but if there is no pattern in Woodies CCI on the daily chart, I will observe the hourly Woodies CCI and look for ZLR and/or Vegas Trade (VT) in order to join the monthly trend.

The second option is the more likely one to happen in my opinion: Pound Dollar is about to break higher. There is a strong scenario for major gains. GBP/USD built a right triangle (as shown in pink) resulting from a bottom line which is a bullish trend line. The price reached this level multiple times but was supported by it. The upper line in pink is a strong resistance. The last target is the sum of pips of the plumb.

In order to join the bulls, the daily candlestick should close above the top line of the right triangle. The final target can be found at 2.0367 (in grey), which are more than 3,000 pips. In this scenario I will also check the pattern in Wooodies CCI in order to join the strong gains. If a daily ZLR or Vegas are parallel to the breakout I shouldn't wait and enter this trade but if there is no technical pattern in the daily Woodies CCI I will move to the 1hr chart and search for a pattern.

The second scenario is more reasonable since the monthly Woodies CCI is at the beginning of its established uptrend. The 50 CCI (in Black) was in the -200 and made two hills in the -100, then crossed the zero line and opened the first green bar which represents the uptrend has just began.

Recap

The GBP/USD pair has had quite a steady move higher since the summer of 2013, after bottoming out at 1.4840 for the second time in 4 months. Since then, the pair has managed a 12.1% increase in price in the span of 6 months. Consolidation occurred between late September and November before continuing higher to recent two and a half year highs. Over the past few weeks the pair has managed to find resistance just under the 5 year high of 1.70, topping out at 1.66 beginning in early January. The current price action points to a correction, with momentum in favor of the dollar.

In this analysis I will only cover technical points to consider for both short and long positions along with fundamental catalysts that could alter the current trend higher.

Technical Analysis

The first point I’d like to bring to your attention is the big move that occurred during the fall of 2008, when the pound dropped from 2.01 to 1.40 during the highs of the financial crisis. The price action we’ve seen since quantitative easing began later that year was a corrective one, with a 50% retracement at 1.6830 acting as resistance for the last 4 years. During this time, it looked to have traded in a wedge (marked in orange) before what seemed to be like a breakout lower that eventually double bottomed at the 1.4850 level. What made this move believable was that the initial break of the lower wedge support retraced to the 62% level before another sharp move lower broke the previous pivot low; however, it was not able to close below the pivot low and from that moment the pound began its 12% rise.

Looking closer at the pounds recent strength, we can see the rise taking place in a channel, which is currently being tested at the support. Previous level of resistance, which acted as support in December, is just under 1.6300, which I think will be important if the channel is broken. If we see a daily close below 1.6200, then I suspect a retracement is in full gear and my target for a short would be somewhere between 1.57 and 1.58, which is just above the 50% fib level of the channel. This retracement should continue to be valid until the January high of 1.66 is broken.

The longer term analysis seems to point for further sterling strength, unless there is a fundamental shift in UK housing, inflation, or economic data that acts as a catalyst for a reversal. Pound strength is also technically supported by the strong reversal following the break of the wedge, and the recent strength that resulted in the 12% appreciation of the pound thereafter. Once 1.66 is broken I expect 1.70 and 1.76 to come into the picture with the earlier being resistance during 2009 and the latter being 62% retracement of the financial crisis.

Outlook

While the longer term trend says long, the shorter term analysis is pointing to a correction in favor of the dollar. I’m looking for this week’s economic data to be the driver of price action with technical support/resistance levels acting as inflection points. The 1.66 resistance must be broken, and I prefer to see a close above the figure, before I consider a long and continuation of the uptrend.

A close below 1.6300 would result in the current uptrend being broken and I will look for 1.6200 as support before a close below will confirm a correction with a target of no less than 1.6000 with continuation to the 1.58 level. This could also be the beginning of a head and shoulders formation.

Summary

The correction could begin when UK and US inflation figures are released this week (Tuesday/Wed & Thurs) or on economic weakness such as US and UK Retail Sales (Tuesday/Friday). Mark Carney is also scheduled to speak on Wednesday. A lot of potential catalysts; I expect volatility and some of the prior mentioned levels being seen as early as Tuesday.

Short term resistance – 1.6500-1.6600

Short term support – 1.6200-1.6300

Alex Kazmarck of Trade Leader SpotEuro presents analysis of the GBP/USD.

Technical Analysis

The weekly GBP/USD chart shows a very long consolidation pattern in the form of a triangle following the big drop during the 2008 crisis. Once the bottom formed near 1.3500 a retracement began to take shape, finding a top just under the 1.6800 level, which can be noted as the 50% retracement level. This triangle continued to consolidate for the next three years until the first quarter of 2013 when it was broken to the downside; however, the move to the downside lost traction mainly due to the dollar and the risk-on environment. There was a double bottom in mid-2013 before the sterling began to rally back towards the upper end of its previous four year range.

Looking at the daily chart, focusing on the July impulsive movement that created a new low during 2013 but was unable to close below the figure, I think many are surprised at the resilience the pound has shown during the last few months. Most of the move can be attributed to a weaker dollar (USD Index) along with supporting evidence of stronger economic growth within the UK; however, I think it’s too early to call this a new trend until we see a clear break above the earlier mentioned 50% retracement.

Once the pair closes above 1.68, it should get a positive boost from a technical perspective and it will be “open water” all the way to 1.76, the 62% retracement on the weekly chart.  If this occurs, the analysis would have lost much of short term bearish potential I’m looking for.

While I’m not calling for any specific direction at this time, I’d like to note that the false breakout to the downside has also created a possible head and shoulders formation with the orange box representing the left shoulder and the current rally representing the “head” of the formation. It’s also interesting to point out the rising trend-line from the triangle acting as resistance.  Having said that, there is also an inverted head and shoulders formation with the double bottom representing the head and the 1.5850 level representing the neck-line as can be seen on the daily chart.

Summary/Outlook

Technically, this setup can play out in several different ways and I am placing more emphasis on the USD than on the GBP. While technically this pair has rallied quite nicely following the false break and double bottom, I am reluctant to take a long at these levels and would prefer to short the pair into a possible risk-off scenario going into the December FOMC announcement. I’m keeping an eye on the daily trend-line and a close below 1.5800 should support the bears. Once the pair closes below the 1.4900 level, the pair should continue to gain momentum and a possible retest of 1.43 and 1.36 will be targeted. Perhaps we’ll continue to see more range-bound activity with increased volatility.

Short term support – 1.6300 to 1.5850

Short term resistance – 1.6500 to 1.6800

The big news of the weekend, not just in the markets, was the Moody’s downgrade of the UK credit rating. As some readers will know, I currently live in England. The news coverage here – national, not just business – has been all over it. Naturally, it has become a political discussion at least as much as a financial markets one. We saw much the same when the US went through this a while back.

Of course the markets have anticipated this sort of thing for some time now. As the chart below shows, GBP/USD has been steadily losing ground since the end of 2012.

We can see that another new low was put in at the start of the new week’s trading in reaction to the news. As of this writing, though, that has been reversed in what looks to be a case of “sell the news”.

We can similarly see that UK yields have been anticipating a development like the ratings downgrade for some time now. The 10yr Gilt chart below tells a similar story as that of GBP/USD in terms of a market which has been generally trending one way this year. Interestingly there, though, UK yields have backed off their highs of late even has the currency made new lows, indicating there’s been some kind of shift in the markets of late.

Of course the trend higher in rates and lower in GBP/USD in 2013 is contrary to what many folks expect to see, namely higher rates equating to a stronger currency. The falling pound coming with rising yields in this case points to a declining interest in UK assets and investments rather than some kind of anticipation of tighter monetary policy by the central bank to combat increased inflation. If we think about the relatively poor performance of the UK economy in the last year, this should come as no real surprise.

Just goes to show that one cannot make pat assumptions about cross-market relationships. There is a causality to the way markets correlate which comes from the fundamental underpinning of the markets.

I bet right about now Jamie Dimon at JP Morgan is quite pleased to have the Facebook fiasco all over the news to take some of the spotlight off his little derivatives problem. As I write this (Tuesday morning), JPM is up 5% and FB is down nearly the same amount on the day. Personally, I think there’s way too much being made of the whole Facebook IPO story - though I do think the NASDAQ system problems is an interesting story, especially after the BATS failed IPO a little while back - but admittedly the rest of the news has gotten rather stagnant. I actually begged CNBC via Twitter on Friday to talk about something, anything, but Facebook, but struggled to come up with a good alternate subject.

Naturally, there’s a blame game going on as to whose fault it is the stock has taken a dive. We can never really know how things would have turned out if the NASDAQ system had functioned properly, but that won’t prevent folks from trying to do so. Finding someone to blame, of course, is a favorite pastime these days. Traders certainly do it when they take losses. After all, it can’t be my fault I lost money on my position. It must be those evil banks, unethical brokers, or speculators gone wild (unless, of course, they are moving prices the direction I want).  Yes, I am a speculator. Obviously, I’m talking about the other speculators, though – especially the ones with computers faster than mine. Yeah, the high frequency guys. It’s all their fault! They’re preventing me from moving out of the 99% and in to the 1%. Something really needs to be done about them.

Thankfully, today we’ve returned to the on-going back and forth between European central bankers and political leaders over what to do about the mess. It’s kind of refreshing after the all-Facebook-all-the-time chatter. Everybody seems to want Greece to stay in the euro, but it looks like we won’t find out until the middle of June as to whether the Greek people share that view. You’ll notice the German rhetoric on the subject of austerity and whatnot has cooled considerably. Could that be because suddenly they aren’t doing all that great either and the weak euro that’s coming out of all this actually tends to help Germany more than most on the export side of things?

Then there’s the on-going question of whether the US can remain out of the fray and avoid too much in the way of economic damage from all the European issues. I’m moving to England in the fall to start work on a PhD, so you know I’m looking for the dollar to go on a fantastic run higher to make my greenbacks go farther. Unfortunately, the UK retained the pound rather than join the euro. The photo going around of David Cameron with arms raised celebrating Chelsea’s performance against Bayern Munich in the Champions League final on Saturday (at last an English team beat a German one in penalties!)  alongside a much less enthused Angela Merkel could just as easily represent the British feeling about having their own currency through all the mess.  I’m hoping the Bank of England decides to do more QE. That ought to sink the pound.

In the meantime, back to my charts.

Oh look! There’s a cup-and-handle setting up on the weekly USD Index chart. Maybe the markets will help me get cheaper pounds without the QE.

cup and handle USD chart

 

Even if one is a short-term trader, it is worth taking a look at the longer-term chart from time to time to see how things are developing in the higher time frames. My daily work has me usually focusing on daily and intraday charts, but now and again I’ll flip over to the weekly chart to gain that broader perspective. The thing I noticed today was an interesting development on the weekly USD Index chart.

As you can see below, the Bollinger Bands in that time frame have been getting progressively narrower since about the first part of the year. They are now very narrow. In fact, on a relative basis (as shown by the purple Band Width Indicator sub-plot) they are as narrow now as they got late in Q3 last year. Notice what happened then.

USD Chart Bollinger Bands

Since the USD Index is heavily weighted to the euro, we basically see the same narrow-Band situation for EUR/USD as we do for the index – just with the chart inverted.  We see similar tight Bollinger set-ups in GBP/USD and USD/CHF, which isn’t too much of a surprise given how closely related those currencies are from a fundamental (and central bank) perspective these days.

The interesting thing, however, is that once you get outside the European currencies the story is different – considerably so in some cases. The narrow-Band situation actually produced a major breakout in USD/JPY earlier this year. Now we’re seeing the market consolidate after its powerful rally.

JPY Chart

In the case of AUD/USD, we’ve got a market basically working through a sizeable range that’s been working since the highs were put in last year. We’re now seeing the market having turned down from its latest swing up, looking quite like it’s headed back for the bottom of the zone.

AUD Chart

If we flip AUD/USD over we get a pretty close approximation of how USD/CAD has traded. There difference, though, is in the recent action. Where the Aussie has been selling off, the Loonie has been holding steady over the last couple of months.

CAD Chart

So what does this all seem to say?

My interpretation would be this. The relatively better performance of the CAD vs. the AUD is indicative of at least the perception of the situations with the US and China respectively. These currencies are seen as closely linked via trade to their large neighbors, so as the US data has gotten better, the CAD has been supported, and as the China data has disappointed, the AUD has weakened.

Japan is largely its own situation. There is certainly some impact from China there, but mainly the yen trades as a function of two things. One is the stagnant economy in Japan, which is showing little sign of doing anything any time soon. The other is US interest rates. The correlation between USD/JPY and the US 10yr yields is quite strong as higher US rates make the yen more attractive as a carry trade funding currency than the dollar, plus more attractive for investment returns.

Then there’s Europe. To my mind, the ranging we’ve seen in the major pairs there is reflective of the markets getting a handle on where everything stands. We’re basically waiting on the next meaningful development. My guess at this point is that will have more to do with the US than it will Europe. I say that because the market seems to see the Eurozone issues as pretty clear with little change expected out of the ECB for a while. If anything the leaning is toward further loosening of policy by that central bank.

In the case of the US, though, the situation is on more of a knife’s edge. As we saw from the reaction to the FOMC meeting minutes Tuesday afternoon, there have been a number of market participants looking for another round of QE3 from the Fed (including the likes of Goldman Sachs). At the same time, though, we have others who see the US on a good sustained growth path. The USD is likely waiting to see which side is going to win that argument. How the USD Index moves out of its current consolidation will be indicative of which way that fight ends up going.

 

Month and quarter ends are always interesting times in the market, with all kinds of capital flows offering the potential to move markets. This time of year in particular we also have Japanese fiscal year end to add to the mix. As we near the finish this quarter, though, I’d like to take a look at what might be coming our way in the next one. Specifically, I want to take a look at the research I’ve done on forex seasonal trading patterns to see what’s ahead for the market.

April is not a very strong month for the USD. In fact, statistically it has been one of the worst. Looking at data back to the early 1980s, we can see that in general terms the dollar has fallen about 60% of the time and lost about 0.5% in value against the other major currencies (I’m not specifically using the USD Index here, but close). The pattern is even stronger since the introduction of the euro. Going back to 1998, the dollar has been down 61.5% of the time for an average annual loss of 0.72%. Only December has a more negative pattern.

One thing that is worth noting, though, is that we would expect to see a positive transition over the next few weeks. We can see that on the chart below, which looks at the 1-month forward returns on a week-by-week basis (measuring 7-day periods, not calendar weeks).

USD rolling returns chart

The featured area is the next 4 weeks, with week 14 representing April 1 to April 7. We can see we start April off in a period of strong negative indications for the dollar, a pattern which began a couple weeks ago. That shifts from negative to positive as we get into the middle part of April, though.

As for what to play on the other side, the pound is the major currency with the best April statistics. The GBP been up in general terms nearly 70% of the time during the month since the euro launch for an average 0.45% gain.

We would therefore expect GBP/USD to have a strong positive bias heading into April and that is indeed the case, as the weekly returns chart shows.

GBPUSD rolling returns chart

Notice here, though, that the pattern shift is much more swift, if also more abbreviated.

This seasonal bias information isn’t a suggestion to go out and get long GBP/USD, though. These biases are just that, biases. There are no sure things and even when the market does move in line with tendencies it can do so in a very choppy fashion. As such, you would likely be better off using this information to help shade your trading – like perhaps being more aggressive on trades you do in the direction of the bias and less so against it.

It’s all about putting the odds as far in your favor as possible. This sort of data, if used prudently, can help you do that.

Now, as to what this means for the global markets…

That’s a bit trickier now that we aren’t seeing the same market patterns that we were seeing in the past whereby the dollar and stocks and interest rates all had pretty well-defined relationships. As a result, we need to be aware of whether the market is in “risk” mode whereby stocks and commodities are rising and the dollar is falling, or in the recent mode whereby the dollar and US Treasury yields have moved together, mainly as a function of whether the market sees more QE coming from the Fed. I personally don’t expect anything like that, but Bernanke has done is best to keep the markets thinking he’s inclined to maintain an accommodative monetary policy and doesn’t want to see long-term rates rising too much.

 

 

Ain't it always the case that an exchange rate rallies into your trip, then starts falling after you've spent the lion's share of the money? GBP/USD did that to me. It was looking so good early in January when the rate was down the low 1.50s, but by I time I left for my trip to England last week the rate was looking at testing 1.60. What day did the market peak? The day I checked out of my longest hotel stay, of course (insert your favorite string of curse words here).

What's even more annoying is that GBP/USD really looks like it's set up for a tumble.

On the weekly chart below we can see the clear support along the line going back to the lows from September 2010 near 1.5300. That was broken during the last leg down, but the market quickly reversed back higher. It hasn't been able to push those gains to even create a test of the November peak, however, so the pattern of lower highs and lows since the 2011 highs remains in place.

GBPUSD Chart

 

These lower highs are also building a head-and-shoulders type of pattern on the chart. If we consider the peak of the pattern to be about at 1.6735, that gives us over 1400 pips in downside projection using the head-to-neckline measurement. A simple target would thus be about 1.3900. This is quite aggressive given the likely support above 1.4000 based on the 2010 lows, but it does provide a fair bit of scope as to the type of damage that could be done should GBP/USD manage a sustained break of 1.5300.

So what's the catalyst for that kind of action? The BoE has already announced GBP50bln of additional QE. That has largely already been priced in and the market isn't looking for any big additions at this point. The biggest risk factor at this point is a crank back up of the risk-off market psychology that would drive the dollar higher. If we see the S&P 500 fail to overcome the 2011 highs as part of the current rally, that becomes a very real risk.

This couldn't have happened a bit sooner?

 

The forex markets are setting up for some very interesting action to start the new year. I'm not referring to developments out of Europe or anything like that, though certainly those sorts of things can be contributory. In this particular case I'm talking about the technical set up of some of the major currency pairs.

I'll start off with USD/JPY to provide the first example. Take a look at the daily chart below and notice in particular how narrow the Bollinger Bands are at present.

Bollinger Bands

 

The lower plot of BWI (Band Width Indicator) tells you just how narrow the Bands have gotten in recent days. The current BWI level - which indicates the width of the Bands relative to the 20-day average – is the lowest it's been in more than 2 years. That tells us USD/JPY is setting up for some kind of violent move. Notice what happened at the end of October and early November the last time BWI was down around this same area. In that case we saw a fake break down with a very rapid reversal. This time perhaps we see the same, or maybe we get a more unidirectional trend move. Either way, as a market participant you need to be ready for increase volatility.

We can see narrow Bands in other places, like AUD/USD…

Trading AUDUSD

 

… and GBP/USD…

Trading GBPUSD

 

As well as among some of the crosses. The JPY crosses almost uniformly have very narrow Bands, and we can see the same thing in the likes of AUD/NZD, with others heading in a similar direction.

In these additional cases, the BWI levels aren't quite as extreme as they are in the case of USD/JPY, but they are still low enough (and still falling in some places) that they need to be taken seriously. They're telling us to be ready for new trends to develop in the new year. Given the mainly range-bound action we've been seeing in many places for a while, this can't be a major surprise. Just how aggressive the markets get, however, could be.

Now is probably a pretty good time to be looking at your trading and/or investing strategies to see how expanded volatility, and potential strong new trends, could impact your performance.

 

Some refer to it as a bank holiday, in Canada they call it Victoria Day and in the US we celebrate Memorial Day. Regardless of the name, for traders it is a day away from the trading screens and hopefully a time to celebrate and take a road trip with family and friends. If you were lucky enough to do just that, then undoubtedly you took a peak at the local economies. You almost have to since traders could set their watches by the economic releases from around the world.

How were the local economies doing? Are more small businesses starting to reopen again or are they still closing? Were people spending money or just browsing in the shops?

Where I was at there was little doubt on how the local economy was doing. This is normally a popular 3-day weekend destination but this year it seemed as if all the hotels had vacancy signs, with some even advertising ‘off-season rates’. Even the day-trippers seemed to have been staying home as there was no need for a reservation at restaurants. This is just one example, though, and maybe the places that you visited had just the opposite true with big crowds.

Will I use this information when I trade for the remainder of this week? Absolutely not. My trades in GBPUSD or EURJPY that hit the Currensee Market Watch table will not be persuaded by anecdotal evidence. If that were the case then most US traders who have had the chance to travel internationally would be underperforming as a weaker US Dollar has made travelling exponentially more expensive for us.

Then why do I bring this up? Last week the US GDP report was released and showed that Q1 growth came in at +3.0%. Consumption accounted for 70.7% remaining the heavyweight in the economy but it was off the highs of 72% from a few years ago. This was also the first time since Q1 of 2007 that we saw such strong consumption levels. Despite relying more heavily on productivity companies were still able to turn out strong profits. The graph below compares the performance of corporate profits to the Dow Jones on a yr/yr basis.

From 1999 through the first quarter of 2010 you can see that the Dow Jones has been receiving a premium for profits. Currently that is not the case. If the US and global economies are bouncing back from the 2007/8 credit crises and companies are producing profits again, then why haven’t traders and investors fully embraced the risk-on trade. (This graph is pre-European crises, but the argument remains the same.)

My guess is that the high unemployment rates have caused investors to spend less and save more than they otherwise would. The ‘flash crash’ and the European crises are not helping either, but in days past those events would have served as an opportunity to place risk back-on. To be seen if this is just a temporary phenomenon, or a change in attitude on saving and spending in the US.

As you trade and invest in the weeks ahead, you will certainly hear from those arguing that valuations are cheap and now is the time to reinvest. Others will argue that another correction (right shoulder per technicians) is ahead. In the end judging the US consumption patterns may be your best guide.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.