Wednesday, October 22, 2014

Bank of England pessimism | the importance of locking in profit

The minutes of the October Bank of England Monetary Policy Committee (MPC) meeting were released yesterday and they made for dismal reading. In a catalogue of negativity the members discussed an apparent loss of momentum in UK growth, muted inflation from both the labour market and Consumer Price Index data, pessimism about the global economic outlook and geopolitical risks in oil producing regions. For good measure they threw in the slowdown in Europe, which remains a major trading partner for the UK, and lower wage and employment growth than they would like.

They concluded that any rise in core interest rates would leave the UK economy in a vulnerable position.

As can be imagined, once these words were digested by the market Cable (as the pound sterling is known) began to sell off. It looked as if the incipient rising trend from last week would be consigned to the also-rans.

But then the GBPUSD pair refused to go below the important 1.60 level (nice round number, beloved of traders) and in fact reversed to the upside, to form what is known in Technical Analysis (TA) terms as a pinbar (see chart above). Price is reckoned by TA practitioners to be likely to move in the direction that is away from the tail. This pattern is regarded as being particularly significant when it appears on the four-hour chart, as it does here. It means that a strong attempt to move in the direction opposite to the head of the bar has been decisively rejected. While it is not a definite buy signal in this case, at least not without confirmation, it is certainly an indicator that one should not consider going short.

The importance of locking in profit

The reversal of Sterling fortunes yesterday, as described above, had the effect of throwing our EURGBP trade (which is our preferred method of dealing with pound sterling strength) into reverse (EURGBP does the business), and causing the pair to oscillate when we were hoping to follow earlier success with a trending move.

Happily, in accordance with standard policy, the Mandelbrot routine had locked in profit on half the position, by means of a hedge trade, and moved the stop-loss on the main order to break-even. We will be looking to re-enter in the direction of the dominant trend when appropriate. Retail sales data will be released for the UK later today and, tomorrow (Friday), the market will have British Gross Domestic Product (GDP) both quarterly and year-on-year to contemplate.

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