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Sterling Digest, 16 July 2013: beware the squeeze

Illustration squeezing housing building
The squeeze always shakes out the weak. Don’t be weak.

Sterling sits on a fence depending on which currency you trade it against. After hitting new 2013 lows last week, the $GBPUSD has since rallied as high as 1.5220. Unable to get back below 1.50, there is a threat that cable rallies even higher. The $GBPAUD, after hitting new 2013 highs, has since retreated back to 1.6350. The $EURGBP is enjoying a nice, albeit slow, breakout to the upside reaching as high as 0.8700. While this week’s data threatens to be GBP-negative, particularly the release of the Bank of England meeting minutes, pay attention to price action. Lower prices may simply translate to better buy opportunities for rallies. With many GBP bears in the market, the squeeze higher could come slowly and painfully. Be aware.

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Sellers Strong But May Need More Time

The $GBPUSD rallied back to the support/resistance zone between 1.5230-70. But the rally exhausted far earlier than expected. In fact, offers stepped in ahead of the zone as price topped out at 1.5220 before falling back to 1.5100 level to end the week.

Now at the start of the week, sellers have taken the $GBPUSD below the 1.5075 support level. The early morning bounce in the European session was capped by the former support level and led to further losses to  1.5027 lows.

GBPUSD 4hr chart

However, the psychological level at 1.50 is always the big obstacle for cable when we trade at these levels. With the disappointing US retail sales sending $GBPUSD higher above 1.50 (to 1.5115 so far), it is likely now that price may, in fact, rally higher back to 1.5230-70 support/resistance zone and even higher into the Fibonacci levels on the 4 hr chart. This failed attempt lower is likely to be met with more fuel for a corrective rally to new highs this week. Of course, this scenario largely depends on how the market reacts to the slew of US and UK economic data including Bernanke’s testimony before Congress and the release of the Bank of England meeting minutes.

Trade what you see.

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Bernanke Talks Down USD

Bernanke gave a speech yesterday afternoon commemorating the 100-year history of the Federal Reserve. However, it was the Q&A portion of the program where Bernanke revealed that the $FED monetary policy could remain accommodative far long after the 6.5% unemployment rate (forward guidance) was reached. I, myself, was not expecting the $FED chair to be as dovish as he was. US economic data has been fairly positive. The US NFP released Friday was a surprisingly  robust report. The economy seems to be going in the direction the $FED wants and expects it to go. Nevertheless, Bernanke communicated that monetary policy will remain accommodative even as the economy seemed to improve.

From there, the USD was pummeled. $GBPUSD moved nicely from 1.4910 to 1.5050 during Bernanke’s Q&A. Then in a blink of an eye price action jumped to new highs at 1.5193. It was incredible to watch in real-time.

GBPUSD 4HR CHART

Now that $GBPUSD has taken out the Fibonacci retracement levels of the latest bearish wave, all eyes have returned to the 1.5230-70 support-now-turned-resistance zone (yellow). The 50% Fibonacci level of the entire collapse from 1.5750 to 1.4813 lies just above there at 1.5280. Even if price manages to rally above 1.5300, cable remains bearish until there is a daily close above 1.5500. We can expect rallies from current levels to be met viciously with offers. Given capital flows, it makes more sense for swing shorts to come in at 1.5250 and higher in order to take out the 1.4813 lows. Thus, I believe we still have some more $GBPUSD rally left in the very short term.

Trade what you see.

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Sterling Digest, 9 July 2013: the Carney effect

Mark Carney face on 20GBP note
Too soon? Or not soon enough?

Last week, on the 4th of July, Mark Carney made his 1st move as Bank of England governor. While the BoE did not move on monetary policy, it was Carney’s introduction of forward guidance that sent sterling tumbling across the board. Under the Carney effect, GBP has been unable to recover as the fundamentals have completed shifted in a very unexpected manner. Many market participants expected Carney to wait until next month to bring any changes to monetary policy. Carney’s big surprise  should bring sterling to new lows across the board during this 2nd half of the year. The Carney effect will only be exasperated by poor economic data as we saw today and merely slowed, not reversed, by any upside surprises in data.

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The Range Breaks

Last week the $EURGBP finally broke the range. It broke that range to the upside and confirmed with a close above the 0.8600 range top.

EURGBP DAILY CHART

$EURGBP opens the new trading week trading above 0.8600 level for the first time since March. This is a bullish move with a potential move to 0.8750 now in the works. Any dips should be supported by the former 0.86 range top. A daily close below 0.8570 invalidates this bullish setup.

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Where Does It Go From Here?

The $GBPAUD finally staged a long overdue correction. Now what? Will the pair follow the AUD lower and resume its rally or will it follow the GBP lower?

GBPAUD 4HR GBPAUD DAILY

Given the Fibonacci levels on the daily chart and the diverging RSI on the 4hr chart, it looks highly probable that the pair resumes the bull trend. However, be aware of the Carney effect.

 

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Carney Makes The 1st Move

fireworks from flickr
Carney set off the fireworks early

New BoE Governor Mark Carney surprised markets today as he made his 1st move on British monetary policy. Instead of the traditional silence on monetary policy hold, Carney not only made comments but gave a full statement to introduce the markets to forward guidance.

At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.  The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds.  This analysis would have an important bearing on the Committee’s policy discussions in August.

Not only has Carney told the market not to expect interest rate rises, he also telegraphed a possible move in policy as soon as next month. And don’t expect positive economic data to stop them either. This make the August BoE meeting even more important and all eyes have already moved towards expectations for it. We can see that already in today’s price action. Pairs that have enjoyed breakouts like the $GBPAUD, $GBPNZD, and $GBPCAD are seeing long overdue corrections. The $GBPUSD remains entrenched in its bear trend and threatens to break down to new lows. A breakout in the $EURGBP seems imminent.

But US markets are on holiday today so the reaction has actually been muted if you can believe it. Expect the real fireworks when US traders return to all this forward guidance (the ECB is announced forward guidance today as well) and the US NFP release. Happy 4th!

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GBP/AUD Tests The Top

$GBPAUD ripped higher on the back of a AUD weakness-GBP strength double whammy. During the Asian session overnight, the Reserve Bank of Australia Governor Glenn Stevens jawboned the Aussie off a cliff. In fact, the market is now pricing in an increased 60% chance of a RBA rate cut in August. As a result, the AUD was throttled across the board allowing the $GBPAUD to rally to 1.6750. Then UK services PMI surprised to the upside and further carried the $GBPAUD to new highs at 1.6858.

GBPAUD 4hr chart

With this news-induced rally, one would anticipate that the $GBPAUD would have broken to new highs on the daily chart. After all, the fundamentals just laid out should support such a breakout. The $AUDUSD certainly did break down to lows not seen in 3 years. The $GBPUSD found a bottom at new lows to break above 1.6250 resistance that had capped price all week. And yet we find the $GBPAUD struggling to take out the top at 1.6877. Perhaps the market awaits the BoE decision tomorrow. Perhaps the market will wait for the 4th of July holiday to pass. Whatever the reason, bulls should be cautious. This rally is looking exhausted with the weekly chart is still working out overbought conditions. All of which makes the $GBPAUD very toppish at these levels.

 

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Will Carney Surprise Us?

This Thursday, the Bank of England (BoE) will deliver its first interest rate decision under Mark Carney. It is widely believed that the BoE will hold monetary policy given that Carney officially stepped into office just 4 days prior. However, Carney could surprise us.

While his official start date was yesterday (July 1), Carney completed his tenure with the Bank of Canada on June 1st. So hypothetically he could have started work on the UK for 30 days already. He certainly has an opinion on British monetary policy (seen here). And the BoE has a good track record for surprising markets.

But enough with the musing. Either way Thursday’s decision goes, the $GBPUSD has resumed its bear trend. After falling to the critical long term support zone between 1.5270 and 1.5230, price fell below it to end the month of June. Bounces have been capped at 1.5250 and price has since fallen to new lows today at 1.5136. Though still in this upward channel, cable is poised to break to the next level of support at 1.5075. If price breaks lower, all eyes are the big psychological level at 1.5000. Given the respect of the Fibonacci retracement levels, cable is still on track to break to new lows below 1.4830.

GBPUSD daily chart

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Sterling Digest, 1 July 2013: dawn of the Carney Era

Mark Carney at the Bank of England
New Bank of England Governor Mark Carney

This is an exciting time for sterling traders as we lay witness to the dawn of a new era. Mark Carney takes the helm today as the new Bank of England Governor. The market, as well as some top officials in the UK government, have been widely anticipating this transition since it was first announced last November. Former Governor Mervyn King has led the BoE my entire forex career. I will miss the always predictable market reaction to King’s speeches (King speaks, sell sterling) but it seems the British are ready for new monetary leadership. Though Carney has set market expectations as a GBP bear, prices will not plunge just because he steps into office. The market will size him up first with plenty of price fluctuations and positioning in anticipation of his 1st interest rate announcement and inflation report. Will the Carney Era bring sterling strength or weakness? British prosperity or recession? In 5 short years, the markets will have their verdict.

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