Monday, October 20, 2014

A stronger pound sterling | …and how we are playing it

Since the middle of last week, Wednesday 15th October to be exact, Cable, or the GBPUSD pair, has been strengthening. This was much to be expected and we had earlier made tentative trades with small drawdowns in anticipation of it. Now we are gearing for the possibility that this move is the genuine article. The UK economy is sound and with the Scottish referendum out of the way, the only direction it would appear for this pair in the medium-to-long term is up.

This week a number of economic events will take place that will have a distinct bearing on the British pound. Tomorrow, Wednesday, we have the Monetary Policy Committee (MPC) meeting of the Bank of England and the release of minutes of the last Bank of England meeting. It is known that a number of the members of the MPC are in favour of early rises to British core interest rates and any further discussion of this has the potential to strengthen the pound. On Thursday retail sales figures for the UK will be released and on Friday there is the Year-on_Year Gross Domestic Product (GDP).

…and how we are playing it

At a recent World Bank / IMF meeting in Washington, Mario Draghi commented that the Euro area was on a different monetary policy track to many of the other major global economies. In this he was hardly telling us something we did not already know, but to hear it from the president of the ECB himself is significant. One of those major economies is the United Kingdom.

The chart above is showing that EURUSD also reversed direction last Wednesday. A fall in tis pair indicates a relatively stronger pound. The rate here is now in the process of negotiating the support that is the 200 period Exponential Moving Average (EMA) on the four-hour chart. It had previously recognised this as resistance on the way up.

Because of the prospect that the ECB will further ease monetary policy, either by concrete action or by rhetoric, or both, and because the Federal Reserve in the USA is now tightening, we believe that the Euro against the British pound is a better way to deal with a stronger UK unit.

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