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.
Carney was supposed to be bearish for sterling. He was supposed to do some monetary magic that would weaken sterling to levels that would jumpstart industry in a stagnate British economy. There is just one problem with that. The story changed. When Carney accepted the position, the British economy was a very sad one. But that is not today’s scenario 6 months later. Numbers have been robust. Optimism is starting to creep in. Headlines are honestly hopeful. But let us not get too ahead of ourselves. The latter part of 2013 is yet to unfold. With sterling moves higher on yields (which are moving higher on growth), the question remains is if this growth is sustainable and repeatable. The uncertainty around this answer plays out as a grinding market for now. The moves are choppy but very well bid into some major resistance levels. ACROSS THE BOARD. $GBPAUD has seen 1.75; $GBPNZD targets 2.00; $GBPUSD has flirted with 1.5750; and $EURGBP remains supported by 0.85. The $GBPCAD weekly chart is unbelievable with price right at long-term resistance at 1.64. Incredible strength in sterling in the middle of August seems a little too good to be true. Wait for September.
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!
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.
Memorial Day was started by freed slaves who sought to honor Union soldiers who had died in the Civil War. It is a day we all pause and think about what service in the military means for freedom. It also marks the beginning of summer; and a holiday shortened trading week. There is very little on the economic calendar from the UK again this week. Lots of releases scheduled out of the US however. USD positioning and flows will certainly grip the forex market again this week. That makes the $GBPUSD a prime opportunity. It also makes the $EURGBP a bit of a battleground. Pick your poison.
Read last week’s Sterling Digest.
Cable ended April hitting the 50% Fibonacci retracement level to the PIP. Pretty impressive for a 30-day rally. As $GBPUSD tops out at 1.5606, it begins the 1st week of May with a lower high (as of this writing). Seasonality trends would have traders note that cable has topped out in April each of the last 3 years. In May 2010, cable was below 1.55 and fell to brand new long-term lows by the end of the month. $GBPUSD finds itself in a similar situation with price action only 40 pips above 1.5500. This week’s BoE rate decision will be closely watched thanks to the RBA’s long-awaited interest rate cut. Most still think the BoE holds policy until Mark Carney takes the helm so Thursday’s event could be a non-event. As such, sterling could be a mixed bag. The ECB, RBA, and BoJ are clearly dovish while the BoC and RBNZ are hawkish. The Fed is on watch but positive data continues to build the case for a strong USD. The BoE’s decision sets the tone for sterling the next 30 days. Which way will the Old Lady lean?
What happened Monday? What a trading day. Commodities fell off a cliff in a real scary way. $GBPAUD, $GBPNZD, and $GBPCAD rallied over 200 pips in yesterday’s trading session as those commodity dollars took a major hit along with $GLD, $SLV, and $CL_F. It was incredible. Then bombs exploded later Monday morning during market hours in Boston. Another terrorist attack in the United States. The USD rallied slightly on the news as $GBPUSD tumbled below support but in today’s trading session cable looks bullish again. The markets feel a bit more stable today as the sterling continues to firm except versus the euro. $EURGBP has taken out major resistance at 0.8570 as it has rallied to new highs so far today at 0.8582. What is the world coming to?