Tuesday, October 14, 2014

Pound breaking down amid economic strength | Forex markets are ranging

The British pound is on the verge of breaking down through the lower edge of the zone of consolidation we highlighted recently (see above). Why should this be so when balance of payment figures, retail sales, and purchasing managers’ indexes all show good progress towards a normal economy? The answer is that dreaded word deflation.

While the annual rate of inflation in the UK is far from negative, it is low, and falling. Yesterday’s Consumer Price Index report showed that it now stands at 1.2% from 1.5% previously. Like their counterparts in Europe, the Brits would like to see it at around 2.00%. Too low inflation is now the number one enemy of central bankers everywhere, made even more feared by comments from such as the International Monetary Fund (IMF). The market believes that the current readings will further delay the start of interest rate rises by the Bank of England, and interest rates are the main drivers of exchange rate rises (or falls) for the currency concerned.

This morning (Wednesday) we have that other arbiter of exchange rate movement, the UK jobs report. A good result here might delay the drop a little, but if previous announcements are anything to go by there will also be concern about low wages and poor participation in the jobs market. All in all, not good for the GBPUSD pair.

Forex markets are ranging

As regular readers will know, the Mandelbrot routine is a trend following system. It is designed to take very small losses or attain break-even when markets are moving sideways, or ranging, so that it can be in the market for when the trends put in an appearance.

After a very nice run down in September many of the major pairs, including EURUSD, have entered into a period of consolidation, where the trend is absent. The above chart shows the Aussie (Australian dollar) against the US dollar as it behaves in this fashion.

It has been in this choppy ranging mode since the start of October and we are now in the middle of the month. This is where the much vaunted patience that is often talked about in relation to Forex trading must come into play.

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