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Sterling Digest, 27 December 2013: the Last Friday

the FED. Free money. Take some. | Gary Varvel cartoon
The reason why GBP continues to rally in some pairs and may correct in others for 2014

It has been an incredible 2013 for GBP sterling. It is only fitting that we see these breakouts only extend further on this last Friday session of 2013. The $GBPUSD, $GBPNZD, $GBPCAD, $GBPAUD, and $GBPJPY all hit multi-year highs today. Amongst these, $GBPUSD is the only seeing a correction off the highs. Others, like the $EURGBP and $GBPCHF,  actually saw sterling decline today though both recovered losses as trading wore on. In thin holiday markets, this last Friday saw volatile price action in contrast to very rangebound markets during the early half of this week. Given the year that was 2013 in sterling, what does 2014 hold in store for GBP trading? Instead of the uniform moves that we got for much of the 2nd half of 2013, it looks like sterling will be a mixed bag in 2014.

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The FED Takes Markets Back To The Old Normal

In an unexpected move yesterday, the $FED began the taper by reducing quantitative easing by $10 billion dollars. It was Bernanke’s last meeting and he couldn’t go out a liar. He said he would taper and he did. The caveat, however, is that forward guidance got stronger by upping the ante on unemployment. Conveniently, it set the unemployment threshold at 6.5% which is the level Janet Yellen stated during her confirmation hearing a couple months ago.

Prior to the $FED’s announcement, the GBP was seeing a pullback pretty much across the board. That dynamic has changed. USD strength can now build as the $FED is the 1st QE-wielding central bank to reduce such operations. We see this central bank divergence playing out already in the $EURUSD and the $GBPUSD. Additionally, this USD strength will weaken commodities and we can see that playing out as $GBPNZD resumes its rally.

As such my outlook has changed in the $GBPNZD while I still remain bearish GBP near term in the $GBPUSD and $EURGBP. Yesterday’s pop in sterling has allowed for good opportunity to short GBP while hovering around the 2.00 level remains a great buy opportunity in $GBPNZD. $GBPAUD remains on my no-trade list (see why).

$GBPUSD

GBPUSD DAILY CHART

$EURGBP

EURGBP DAILY CHART

$GBPNZD

GBPNZD DAILY CHART

 

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Central Bank Tailspin

Like I said this morning, I don’t trade with central banks. When a central bank is actively manipulating their currency, that is a currency that I will not trade. As of last week, the Australian dollar was officially listed on my no-trade list.

And you can see from price action. Of the 4 GBP pairs I actively trade, $GBPAUD is the only one that has remained buoyant. It has even hit the long-term bull target I pointed out weeks ago at 1.8250. Last week, RBA Governor Stevens openly admitted to intervening in the forex markets to deliberately weaken the AUD. He even went as far as to tell markets that his preferred level in $AUDUSD is 0.85. That’s 500 pips away so you can imagine what has to happen to the AUD from current levels. Though technicals had pointed to a significant dip in the $GBPAUD below the big 1.80 psychological level, I suspect that the $GBPAUD remains bullish as dips will be aggressively bought in anticipation of RBA intervention.

Despite the tinkering in the AUD markets, GBP remains on the back foot as this new trading week opens. Even as a general GBP bull, I still remain bearish sterling near term as I believe these monster rallies are also deserving of some monster corrections. After last week’s action, the weekly chart is now my chart in play.

Mentioned above: BTFDtv.com Fx Update Desk interview

$GBPUSD

$gbpusd_12_17_13_5_38_AM

$EURGBP

EURGBP WEEKLY CHART

$GBPNZD

GBPNZD WEEKLY CHART

$GBPAUD

GBPAUD WEEKLY CHART

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Sterling Begins To Unwinds

At the beginning of the week, I put out some charts that I was watching on a correction. Corrections of last week’s rallies materialized and sterling put in even higher highs across the board: $EURGBP hit 0.8250, $GBPUSD hit 1.6450, $GBPAUD hit 1.8190, $GBPJPY hit 169.17, and $GBPNZD hit new highs last week at 2.0238. These are major levels not seen in 3+ years for some of these pairs. It seemed as if nothing could stop GBP bulls.

Today, however, after monster rallies not just last week but for much of the 2nd half of 2013, it looks like sterling may be in for some major profit-taking. The Bank of England staying put on monetary policy again today gave buyers reason enough to begin booking profits. In fact, it would not surprise me if we saw these rallies start to put in major corrections in this last month of 2013.

If levels on the daily chart are broken, look to the weekly chart retracement levels. If we see price start to break the 61.8% Fibonacci level on the weekly charts, sterling could be looking at a reversal in 2014.

$GBPUSD

 gbpusd daily chart

gbpusd weekly chart

$EURGBP

eurgbp daily chart

eurgbp weekly chart

$GBPAUD

GBPAUD DAILY CHART

GBPAUD WEEKLY CHART

$GBPNZD

GBPNZD DAILY CHART

GBPNZD WEEKLY CHART

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New Week Possibilities

After a strong week, it is not surprising to find sterling spending another Monday consolidating gains and pulling back off fresh new highs. If the trend continues in this new 1st week of a new month of trading, a correction of mostly last week’s rallies could provide opportunity for bulls. However, it also gives us levels to watch if the correction decides to turn into a deeper reversal.

$GBPUSD

GBPUSD 4 HOUR CHART

$GBPAUD

GBPAUD 4 HOUR CHART

$GBPNZD

GBPNZD 4 HOUR CHART

$EURGBP

EURGBP 4 HOUR CHART

 

 

 

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Not Yet A Breakout

$GBPUSD has finally hit 1.6300. After hitting resistance at 1.6250 for over 3 months and dropping to 1.5850, cable finally managed to hit the big psych level at 1.6300. I see many bears in the $GBPUSD stream at this price level. While a daily chart breakout is hardly a bearish event, check out the weekly chart. We’ve been here before…with no follow through.

GBPUSD WEEKLY CHART

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GBP/AUD Can Go Higher Still

Sterling’s massive rally last week was led by the $GBPAUD which staged a breakout above the August consolidation highs just shy of 1.7500.

GBPAUD WEEKLY CHART

This breakout was launched the week the BoE and RBA made divergent comments on their respective monetary policies. That week price was struggling with 1.7000. Since then, price has rallied 800 pips. And given the new trends in global central bank policies, this trend could be just beginning. So how far can this trend really run?

Looking further out on the weekly chart, price trades very bullish above 1.7500 with 3 levels clearly on the radar to the upside: 1.7750, 1.8000, and 1.8250. With 1.7500 as clear support (evident on this week’s early dip that only went as low as 1.7570), $GBPAUD has more room to run higher.

GBPAUD WEEKLY CHART

Read also: Central Bank Divergence (FMFX)

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Central Bank Divergence

ECB cutting rates this month was an aggressive move when most central banks have taken to jawboning under the guise of forward guidance. Action by the ECB definitely puts it squarely in dovish camp and the leader of the pack.The ECB and the RBA are firmly dovish having both cut interest rates already this year and keeping the door to accommodation open. The RBNZ and BoJ are biased dovish preferring to talk down it’s currency rather than take real action. The BoE and BoC are biased hawkish as they awaits for its recovering economies to, well, recover. The $FED, however, leads the hawks with a broken taper promise. However, the chairman-elect may move the $FED away from the edge and back to loving embrace of the doves. LOL. Time will tell.

The Bank of England has been a big game changer for sterling since Carney has taken the helm. I think the market always knew he would bring change to the BoE. However, I believe the market believed Carney would be bearish for sterling. But the markets have perceived the BoE to be hawkish for quite some time thanks, in large part, to UK economic data that have  been surprisingly sustainable and robust since the summer. Once Carney set forward guidance in August, the data has kept the BoE on hold with monetary policy. This month, Carney has been outright hawkish in his delivery of the inflation report and following television debut. You have to wonder at his cleverness since those dovish comments as Governor-elect over a year ago.

But you have to love this new landscape. These divergences are what trends are made of! With the end of 2013 fast approaching, we could see these divergences manifest in new trends as holiday volatility increases in the markets. Already we see a massive breakout in the $GBPAUD and EURGBP as these pairs best reflect these central bank divergences. $GBPUSD is a battle of the hawks as moves remain rangebound. Watch how other pairs act as the divergences in central banks become more apparent.

EURGBP DAILY CHART GBPAUD DAILY CHART GBPUSD DAILY CHART

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