Market commentary and analysis insights. Brought to by FM Capital Group.
I had the good pleasure of talking about my trading style and markets with master trader, @spz_trader, earlier this week.
Catch the Fx Update Desk New Year’s show on Friday, January 3rd! I’ll be back with Pauly talking markets in 2014 with another professional trader @Nic_trades, a fellow lady trader who I’ve been following for over 5 years now. I’m super excited to meet her. Be sure to tune in!
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).
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
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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.
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.
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.
Read also: Central Bank Divergence (FMFX)
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.
Read also:
You cant make someone change from being either a lefty in denial or a miserable pessimist (ukipers) that dont want a recovery. I for one will enjoy the upturn and reap the benefits with my company as I can already see. Must go work to do
The above quote is a comment on an article in the Telegraph yesterday that the UK economy is recovering at the fastest rate in the world. During the summer, the UK economy showed some great numbers from all sides of its economy. Construction and manufacturing were buzzing, consumers were spending and house prices were rising. From June through August, services PMI numbers surprised to the upside. Even construction and manufacturing had some very robust months which becoming a great sign of recovery as these sectors in particular suffered tremendously during the Great Recession.
| October | September | |
|---|---|---|
| Manufacturing PMI | 56.7 | 57.5 |
| Construction PMI | 58.9 | 60.1 |
| Services PMI | 60.3 | 60.4 |
While this week’s PMI numbers may have missed expectations, these are some strong PMI numbers. All numbers are nicely above 50 indicating a very robust recovery in the UK. In fact, the September numbers were revised upward since 1st reported a month ago. It looks as though the fundamentals have come to reflect what price action has been telling us for the past few months.
So why the selloff this week? $EURGBP has rallied close to 150 pips off the lows. $GBPUSD and $GBPAUD have both tumbled handsomely from their highs. It looks like a classic case of buy the rumor, sell the fact. The market is forward thinking and now that fundamentals support price action, bulls are taking profits.
Sterling is still very much bullish even at current levels in $GBPAUD, $GBPUSD and $EURGBP. However, these corrections have broken key support/resistance levels opening the door for a deeper correction into next week to match these tremendous GBP rallies.
Mentioned above:
UK economy growing at fastest rate in the developed world (Telegraph)
Global PMI Data (Avondale Asset Management)
Read also:
GBP/USD In Yet Another Correction (FMFX)
Australian Dollar Puts In a Bottom (FMFX)
Reality Bites (FMFX)
Respect the Zone (FMFX)
During the Tuesday Asian session and into the European session, the $GBPAUD fell to new lows at 1.72. This weakness is attributed to, first, the RBA staying pat on monetary policy when just last week the market was dealing with rumors of an interest rate cut from the RBA. A no-change announcement sparked a relief rally in the AUD, sending the $GBPAUD lower.
Into the European session, the downside only accelerated as UK manufacturing missed market expectations. This helped price reach the 61.8% Fibonacci level at 1.72. However, this price was met by bids and buyers took the weakness as the opportunity to pile into the long term bullish trend that is still very much intact despite the price weakness.
Now with price up over 80 pips already from those 1.72 lows, it looks too late to get into this long trade. Never chase a trade but learn, instead, from the missed opportunity. The moral of the story: when price starts to fall off its highs, draw the Fibonacci levels and wait for price to react accordingly. The trader can then act accordingly.
We left off the Digest musing over the strength in sterling due to robust UK economic data as GBP hit long-term resistance levels against all major currencies. Since August, GBP has experienced tremendous breakouts in some pairs and significant price corrections in others. Now that $GBPUSD is above 1.60, $GBPCAD above 1.65, $GBPAUD above 1.71 and $EURGBP at 0.84, it seems as though GBP bulls are having their way. However, these moves have not been without resistance. The moves higher in sterling have been a grind with slow, choppy moves that have been difficult to trade on anything but a short term basis. With a light calendar this week, the market has allowed GBP to correct but robust economic data gave life to sterling as $GBPUSD, in paritcular, managed not to loose its important 1.60 level. With 3Q at its end, October brings the market its first glimpse of fall season data. If the UK economy continues to put in robust results, expect GBP to continue its summer rally back to long-term resistance levels.
Read the last issue: Sterling Digest, 23 August 2013: reality bites
The FXStreet’s Live Analysis Room has become a fun place to stop by and chat markets with veteran trader Dale Pinkert. He has a brought on a wide-array of traders and market participants from all sides, aspects and backgrounds. It’s always an honor to be asked back. (Click the image to listen)
