Monday, August 25, 2014

Dollar-Yen sticks to the script – for now | Sterling’s strange behaviour

We have written about the Dollar-Yen pair undergoing a possible breakout in recent times, and so far it seems to be sticking to the perception that up is the only way for it to go.

Now, however, it has reached a resistance level, with another one on the near horizon (see chart).

The main consideration here is that the pair has had its resurgence on the back of general US dollar strength more than specific weakness in any of its major counterparts, with the exception of the British pound (see below).

This week there are a number of data releases in the States that could have a bearing on this situation. They include Durable Goods orders and Consumer Confidence (today, Tuesday), annualized GDP figures tomorrow (Wed) and year-on-year Personal Consumption Expenditure (PCE) on Friday. All of these have the capacity to surprise to the downside. 

The situation must be seen also in the context of a less than full hearted commitment on the part of Fed Chair, Janet Yellen, to any advance in the timing of interest rate rises and the fact that, as yet, we have not exited the holiday season. That will occur at the end of the month of August, but of course there is not a definite scheduled point in time for the resumption of volatile trading.

Sterling weakness surprises

While one of the foremost rules for Foreign Exchange trading is that one should expect the unexpected at all times, the behavior of the British pound against both the US dollar and the Euro has been particularly marked in its recent pull back.

As can be seen above, the 200 day EMA on the GBPUSD pair was sliced through (blue line above), as a knife might slice through butter. While much of this is down to dollar strength, as discussed above, the pound has also had a poor showing against the Euro, which is in a definite decline in all other theatres of war at present.

So we look for a possible reason for this, as the fundamentals of the UK economy have not changed since Cable, as Sterling is known, was on a tear to the upside until the start of July of this year.

A short term catalyst for the decline could be the mixed signals that have emanated from the governor of the Bank of England, Mark Carney, about the closeness or otherwise of interest rate rises. But this seems an excessive reaction to these sentiments.

Our favourite theory is that the Forex market has decided that some uncertainty exists (and all markets hate uncertainty) about the future structure of Great Britain in the context of the upcoming referendum on Scottish independence. This takes place on September 18th, a little over three weeks from now.

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