Thursday, February 27, 2014

Possible Sterling breakout revisited | Dollar bull or dollar bear?

It is in the nature of Forex trading to have to wait for a setup to happen. Sometimes this can take time and even when it looks like having arrived, it can turn out to be a false dawn.

Last January 31st we highlighted the fact that Cable, as the GBPUSD pair is known, had approached a level that might have real significance. See “British pound could push the boundaries”. Here we talked about the possibilities of it breaking through its 200 period Simple Moving Average (SMA) on the monthly chart. As can be seen above, price has just poked its head above this indicator again, and this at a time when there is at least some talk of the Bank of England Monetary Policy Committee (MPC) raising interest rates. Of all the factors that contribute to the strength or otherwise of a currency, raising rates is up front and centre.

There is only one problem with regard to going long on this pair, and that is the prospect of the US dollar also gaining strength, which would militate against a rise that might be warranted in the case of the pound when trading the GBPUSD pair. But see below.

Dollar bull or dollar bear?

There is a great debate going on about what might be happening in the United States economy. Those who would push down the dollar point to apparently weakening economic fundamentals, such as employment reports and manufacturing output. The bull camp says that these are the result of the severe weather in many parts of the USA and that the economy will rebound with a vengeance when storms calm and temperatures rise.

Janet Yellen, Chair of the Federal Reserve, in her most recent testimony to Congress earlier this week, effectively said she did not know the solution to this conundrum.

Right now we are on the side of the dollar bulls, but only as a working hypothesis. As always, it could be fatal to become wedded to a viewpoint in trading. One must always be objective. That said, in the case of the Brits moving ahead with measures that might strengthen the pound, as discussed above, a better way to play it might be to sell the EURGBP pair. This is because the Euro zone has issues. A significant one is the fear of deflation, and any measures taken by the ECB to counter that will tend to reduce the value of the Euro.

And another problem has just arisen. The EU commitment to provide funds to the new regime in Ukraine (if it survives) has effectively presented the EU with another bailout programme.

Just recall what the last ones, in Greece and other peripheral states, did to the Single Currency.

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