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Author: @faithmight

Lydia Idem is an investment advisor who has been an investor and trader for 23 years. She has been a special guest on TD Ameritrade Network and Benzinga’s #PreMarket Prep Show; featured in FORBES Magazine and CNNMoney; and co-author/contributor to The StockTwits Edge and Trading: The Best of The Best. In 2014, she launched FM Capital Group LLC, a registered investment advisory firm serving people of color. Lydia was recently named #22 of the Twitter Accounts Investors Need to Follow in 2017 and #3 of the Top 10 Women To Follow In Finance for 2015. Lydia has a Master of Science in Management (Georgia Institute of Technology) and a Bachelor of Science in Computer Science (Vanderbilt University). Follow me on Twitter: @faithmight Follow me on Instagram: @faithmight Follow me on Facebook: fb.com/fmcapitalgrp
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GBPUSD Can Still Go Higher

Last Friday, $GBPUSD moved beyond the 1.5250 resistance that has capped rallies since February. This price move is pretty significant and sets cable up for a nice correction of the entire breakdown into the 1.5600 50% Fibonacci level. However, despite the new highs, sterling came off its across-the-board Friday highs as corrections set in during the Monday trading session.

GBPUSD 4hr chart

Price so far has managed to find support in the former resistance zone between 1.5230 and 1.5250. But bulls shouldn’t get too aggressive here. Later this morning, markets expect the release of UK manufacturing PMI number. As manufacturing and construction data releases have been poor all year, the market expects another weak number. I expect knee jerk price reaction on a poor release to send $GBPUSD lower into the yellow buy zone. But because the market expects such a release, the bearish sentiment will be short-lived. As such, I expect that price can still move higher still into 1.54 long-term support-turned-resistance. Conversely, a stronger-than-expected release has the potential to reignite this GBP rally ahead of the 50% Fibonacci level. Trade what you see!

Background reading:
Can Sterling Really Rally? (FaithMightFX)
Sterling Digest, April 8 2013: freedom to grow (FaithMightFX)

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Sterling Digest, April 8 2013: freedom to grow

Political cartoon from The Independent. Bust and Bust for sale
This may not work but neither will austerity

As expected last week, sterling has strengthened though mostly on the back of weaker fundamentals elsewhere in the world. The weaker-than-expected US jobs report helped $GBPUSD surge above 1.5250 resistance that had capped rallies since February. The weak Canadian jobs report also sent $GBPCAD to new highs at 1.5650 also not visited since February. The $GBPAUD reached new highs at 1.4825 on the back of a still dovish RBA. The only sterling pair that hasn’t found GBP strength is the $EURGBP as the EUR finds a Cyprus bottom for reasons outlined well in the linkfest below. It’s a light calendar this week with all eyes on Wednesday’s FOMC minutes release.

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More Evidence of Sterling Strength

Yesterday, I outlined the case for a potential rally in sterling via the $GBPUSD currency pair. But there are other sterling pairs that are also showing potential for GBP strength as well. Let’s look at two of those pairs.

EUR/GBP

The $EURGBP had a bearish divergence as it found resistance yesterday against 0.8500 major psychological level. However, sterling weakened tremendously into today’s Bank of England (BoE) rate announcement (the 1st of 2Q2103) causing the pair to spike above 0.8500 to a high of 0.8521. Now that the event risk has passed, the pair has moved lower and looks to target support at 0.8400. A break below targets the 50% Fibonacci level at 0.8285 giving GBP a 200-pip rally.

EURGBP daily chart

GBP/NZD

The $GBPNZD had a bullish divergence yesterday even as it dropped to new lows at 1.7909. The pair rallied to the major psychological level at 1.8000 where it found resistance into the BoE rate announcement. However, like $EURGBP, after the announcement sterling strength pushed the $GBPNZD above 1.80 to a high today at 1.8054. Even on today’s intraday pullbacks, price is managing to now find support at 1.80. If this level can hold as support, this pair can rally back to the resistance zone between 1.84 – 1.8450. A break above this resistance has the potential to rally to 1.8900, the 50% Fibonacci level of the entire breakdown, giving GPB in this pair a 900-pip rally.

GBPNZD daily chart

Given these daily charts, I have to stress that GBP strength goes against the very strong bear trend that has seized sterling since the beginning of this year. Any rally will be VERY choppy, meaning, highs will be met aggressively by sellers. We have seen this in $GBPUSD just this week with highs at 1.5260 on Monday being sold to 1.5075 lows; and again with Tuesday highs at 1.5150 being sold to 1.5033 today. Therefore, it is prudent to take profits at resistance levels rather than hold for large swing moves. It is also prudent to pay close attention to the BoE. If the vote shifts to more members wanting additional QE or if an actual QE increase materializes, all bullish bets are off. However, the converse is also true. If fewer members call for QE and monetary policy continues to be on hold, a sterling rally can really take hold. The BoE minutes are due out in a couple weeks. That will give us our first 2nd quarter impression of what the BoE sentiment really is.

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Can Sterling Really Rally?

In this week’s Digest, I made the assertion that after a dismal 1st quarter, sterling could stand to rally during this 2nd quarter. Much of GBP weakness has been fueled by the weak UK economy and dovish central bank rhetoric. However, these fundamentals caught a glimmer of optimism from last month’s Bank of England minutes that explained the hold in monetary policy so far delivered. While the market expected more members to join Governor King in favor of more QE, the dove cohort remained the same. What was new to the minutes was discussion that more QE would further deteriorate the value of the GBP. Hence, despite King’s disregard, the rest of the BoE actually is paying worrying attention to the country’s high inflation.

This new rhetoric is hawkish as sterling has been firming across the board. HOWEVER, it has been choppy because the long term trends are still firmly bearish. The $GBPUSD has moved higher but highs continue to be met by sellers parked in at the former yearly lows between 1.5230 and 1.5250.

 GBPUSD daily chart YESTERDAY

Even with an 800-pip rally off the lows, cable still remains in a downtrend. Such a rally targets the 50% Fibonacci retracement level of the entire breakdown at 1.5600. However, traders should understand that any bullish sentiment is strictly short term and again very choppy with plenty of sellers parked at 1.5250.

GBPUSD 4HR CHART TODAY

Despite the sellers, price has been unable to get back below the major psychological level at 1.50. On yesterday’s move down (due to poor UK manufacturing data), I had my eye on the yellow zone marked by 1.5075 support and the 50% Fib at 1.5042. With today’s UK construction PMI release, I suspected that price would spike lower in the 50% Fibonacci level but find buyers and start to rally higher. Instead, price bottomed at the 1.5075 support level and staged a nice rally in today’s price action.

 GBPUSD 4HR CHART TODAY

Price rallies now target 1.5250 yet again and should be expected to be met by sellers again. However, once price clears this resistance zone, look for price to target 1.5300 resistance and then the large psychological level at 1.5500 on its way to 1.5600.

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Sterling Digest, April 1 2013: the quarter for sterling

A handful of money, UK sterling coins
Start the new quarter with a handful of sterling

Happy new quarter! The 1st quarter of 2013 has seen US and UK equity markets rally into new highs; the euro rally until Cyprus hit; and sterling plunge to new lows all the while. As the new quarter gets underway, it is an interesting time to think about sterling rally. Since Cyrpus has undermined confidence in the European banking system, the $EURGBP has fallen accordingly. Likewise, the $GBPUSD, $GBPAUD, $GBPNZD and $GBPCAD are failing to move lower after hitting new yearly lows. It stands to reason that this next quarter could bring a sizable correction to GBP weakness as sterling enjoys safe haven flows and a central bank on hold until its new governor takes the helm.

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Sterling Digest, March 26 2013: intriguing strength

front page of City AM March 21 2013
Perfect environment for a weaker GBP

Thanks to Cyprus, sterling managed to catch a bid last week on European haven flows. To start this new trading week, however, GBP has traded weak with $GBPUSD, $GBPAUD and $GBPNZD all off their highs of last week. Naturally, sterling still remains stronger versus the euro as the Cypriot crisis still remains. With a relatively light news week from the UK, look for sterling to remain mixed as it gains strength against the euro and possibly the USD but remains weaker against the commodity dollars.

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Sterling Digest, March 17 2013: dangerous precedent

cartoon depicting Cyprus bailout
Very dangerous indeed

Cyprus has put the PIIGS front and center again just when market participants thought that ship had finally sailed. Citizens of the PIIGS, in particular, should rightfully be concerned about the possible seizure of their bank accounts. Furthermore, if you have money parked in any country that was on the brink of a bailout, you are headed to the ATM right now and to the teller window come Monday. So what does this have to do with sterling? Just when it looked like the weak GBP trend would resume in this new trading week, expect sterling to strengthen on the back of safe haven flows behind the USD, CHF, and JPY. While this is certainly the case for the Monday open, will this new safe haven status really last? With all the news from the UK this week — CPI, BoE minutes, unemployment report, and retail sales — one can have her doubts. Not to mention the RBA and FOMC minutes releases too. Remember it is market reaction to the news, not the news itself, that dictates price action. This week will be no different.

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Sterling Digest, March 11 2013: the charts that worry

Various denominations of GBP in regular visible light
Price doesn’t look this pretty

Sterling did produce a correction rally last week as $GBPUSD made a high at 1.5200, $GBPAUD as high as 1.4850; $GBPNZD as high as 1.8350; $GBPCAD as high as 1.5650; and $EURGBP as low as 0.8590. These rallies, for the most part, kept GBP below previous long term lows. This technical development was certainly the case for the $GBPUSD, $EURGBP, and $GBPNZD where all pairs have broken long term support levels. While the BoE did not move on additional QE, the surprising development of the week was the BoE’s possible change to a dual mandate to combat both inflation and unemployment. With this new trading week very light out of the UK, expect sterling price to continue to weaken across the board. While US news and the RBNZ rate decision will influence those respective currency pairs, the protocol with sterling is clearly to sell the rallies.

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Sterling Digest, March 4 2013: more stimulus possible

Financial Times front page on September 17 1992
Could history repeat?

As expected, sterling continued its descent and dropped to new lows last week as traders began to short GBP en masse. However, when much-lower-than-expected UK manufacturing PMI failed to produce a selloff on Friday, it became clear to me that perhaps sterling may be due for a bit of a correction. This week, traders are treated to rate decisions from the Reserve Bank of Australia, Bank of Japan, Bank of Canada, Bank of England and the European Central Bank. With poor economic data in the UK and the revelation of more MPC members in favor of additional monetary stimulus, the BoE could surprise the market with more accommodative policies. Any dovish announcement will see sterling break to new lows while a hold on policy could fuel a GBP corrective rally. It should be an interesting week.

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Sterling Digest, February 25 2013: hardly at extreme levels

KAL Cartoon in The Economist
Put GBP on the roof and you illustrate current sterling sentiment in the market

Sterling weakness accelerated last week and culminated in the UK loosing its AAA credit rating on Friday. Now that monetary policy is dovish, economic activity nil, and credit rating downgraded, sterling has entered this new week of trading with a trifecta of negativity. And yet traders are hardly short GBP yet. In fact, I don’t think we will have reached extreme levels of short GBP trades until, $GBPUSD trades at 1.4750, $EURGBP at 0.8900, $GBPAUD trades below 1.4500, $GBPCAD below 1.5400, and $GBPNZD below 1.8000. Until price gets to those levels, expect corrections to be short-lived as the weak sterling trade gains momentum.

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