Just last week, the British pound was forging a steady rally off its multi-year lows against many of its counterparts as data showed the rest of the world's fundamentals were coming down to meet those of the UK. However, this dynamic has changed after the Bank of England's governor stated the economy was in a depression and the currency market's taste for risk turned from seeking yield to avoiding losses. Is this young, bearish wave true continuation or simple a pullback in a burgeoning rally? Our DailyFX Analysts give the outlook through their sterling picks for the week.
Chief Strategist - Antonio Sousa
My picks: Short EUR/GBP @ 0.90 Limit
Expertise: Global Macro and Behavioral Finance
Average Time Frame of Trades: 1 month
I expect the British pound to outperform the euro on speculation the European Central Bank will have to cut interest rates beyond what traders had previously anticipated. In fact, recent economic data continues to point towards a sharp contraction in economic activity in the euro zone and lower interest rates could be needed to prevent the region from falling into a severe recession. The trading recommendation I have for today is to sell-short EUR/GBP with a limit order at 0.90 with a stop in a daily close above 0.91 for 200 pips in profit potential.
Currency Strategist - John Kicklighter
My picks: Pending Long GBPAUD
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
Just a week ago, the pound was extending a steady rally that had many believing the currency had turned for good. And, with a clear trendline and 50-day SMA acting as a catalyst, I found entry on my long GBPUSD setup last week just before the market drained its liquidity for the weekend. In an optimal world, I could have entered just before the close and taken part in the last 200 point bullish push through Monday's session; but I typically have a rule that I avoid short-term trades and confirmed entry on longer-term positions just before or at the weekend. A less than optimal entry would on Monday's open would limit the potential for return and my initial target would not be reached before the market reversed and the short-term rising trend I was using as a moving stop would be crossed. This sharp reversal in the pound has been monitored through most of the crosses thanks to disturbing comments made by Bank of England Governor Mervyn King in which he suggests the economy was in a depression. With consistent disappointment through economic indicators, it wasn't much of a stress for fundamental traders to latch on to this fear. Now the market is left to wonder if the UK is truly in the worst fundamental position among its industrialized peers or if the rest of the world will deteriorate to even out the playing feild. This is a major driver for the pound crosses; but it isn't the only one. We also have to consider risk trends. While the pound is usually on the short end of this stick; we can see from GBPAUD, that the skew in yields has dampened the interest in growth alone.
In looking for a breakout to the long side, I am skirting strong fundamental influences behind the pair; but this in turn accounts for much more pervasive sentiment trends. What's more, it also rides on the belief that the pound will sink but is not prepared to forge a trend of new lows against its most liquid counterparts. This is a counter-trend position to take however; so there is a speculative slant to it. As usual, I will look for technical confirmation for a position. Holding with the rising trend that begun with the new year, I will look for the descending wedge formation that has developed over the past two weeks to produce a bullish breakout. Currently, the falling trend from the Feb 1st swing high is at 2.2200; but the better trigger would likely be a move above Tuesday's swing high at 2.2350. Initial targets should be well within the Feb 1st swing high and stops should follow short-term, intraday technicals rather than being set below below range support at 2.1775. Should the market close below this range low / 20-day SMA / Fib before an upside break; my long bias will be negated and I will look for a short-term bearish move.
Currency Strategist - Terri Belkas
My picks: Flat GBP
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 Day - 1 Week
My last GBP pick was to buy GBP/AUD on a break above 2.29, but with such a move looking long-off, I think it may be best to stay flat GBP. Most of the major currency pairs have been range trading with prices sitting right in the middle. Until pairs like GBP/USD get to more definitive levels, establishing new positions seems very risky and frankly, not worth it.
Currency Analyst - Ilya Spivak
My picks: EURGBP Short (pending)
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
In my analyst pick from Tuesday, I wrote that The Euro lost bullish momentum having rallied decisively against the British Pound in recent months, breaking below rising trend line support that has held up the pair since late October. Prices now look to be finding support above 0.8630, a level that acted as significant resistance in mid-November and as support in early December. Looking at candlestick positioning, we see two strong bearish days followed by clear indecision starting with a doji and followed by a star candle. Look for a corrective rally in the coming days to offer an attractive opportunity to enter short.
The corrective bounce has surely materialized: The Euro has added nearly 2.7% against the Pound over the last two days and bullish momentum has carried through the current trading session (spot is at 0.9040 as this is being written). Continue to monitor price action in the coming days for signs that the retracement has run its course and enter short, initially looking for a break past the swing low at 0.8630.
Currency Analyst - John Rivera
My picks:Short GBP/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 2-4 Days
My long GBP/USD call last week was good for over 300 pips as I added to ongoing long positions after the pair broke above the 50-Day SMA. The Sterling would ultimately reach as high as 1.4998 before finding resistance. The cable has been in a freefall since then as the BoE has signaled that they will continue cutting interest rates and take a hard look at quantitative easing. Therefore, we may see the GBP/USD look to test support at 1.4000. Therefore, I have changed my bias and putting on a short trade as we may see the GBP/USD look to test support at 1.4000.
Currency Analyst - David Song
My picks: Short GBP/JPY
Expertise: Fundamentals and Technicals
Average Time Frame of Trades: 2- 10 Days
After reaching a high of 141.55 last month, the GBPJPY slip to a low of 118.83 on 1/23, and as investors remain risk adverse, I expect the pair to retest the January low over the near-term. At the beginning of the week, the pair pushed to an intraday high of 137.40 to cross above the upper Bollinger band, and the sharp retracement following the move favors a bearish forecast for the pair. In addition, the pair fell lower during the overnight session to cross back below the 20-Day SMA, and I expect the pound-yen to work its way below 127.47 (38.2% Fib) over the remainder of the week, and will set my target for the 1/20 low of 124.68.
Currency Analyst - Joel S. Kruger
My picks: Pending Sell EUR/GBP @0.9135 for 0.8635 Objective, Stop @0.9220
Expertise: Technical Analysis
Average Time Frame of Trades: 1 Day
The 50-Day SMA had been a big supporter of the cross on dips for much of the up-move to life-time highs in the latter months of 2008. On January 30, the market finally broke back below the 50-Day SMA to signal a shift in the overall structure and likelihood of a major top by 0.9805 (30Dec high). Now, we are looking for the former moving average support to act as a resistance point and will sell into rallies to the 50-Day SMA which currently comes in by 0.9135. The daily Average True Range (ATR) stands at 185 pips, and based off of the current daily low of 0.8955, projects a potential high of 0.9140 today, which almost directly coincides with the 50-Day SMA. RECOMMENDATION TO BE REMOVED IF 0.9135 NOT HIT ON THURSDAY.
Fundamental Catalyst - Wednesday's ultra dovish Bank of England inflation report has been the primary driver for the renewed Sterling depreciation, while elevated risk aversion and a sell-off in global equity prices has also contributed to the negative UK sentiment. However, we continue to see significant deterioration within the Eurozone economy that should now be able to offset the negative Sterling price action. The one thing we have seen throughout this global crisis is that no economies are immune to the current market environment with each respective country having to work its way through the economic downturn. It stands to reason that those economies that can fight there way through the mess first, will end up being the greater beneficiaries in the long-run. If we discount yesterday's inflation report, there has been a clear pattern over the past several weeks of UK data finally exceeding expectations while the Eurozone data has been more frequently coming in weaker than expected. This tells us that we have reached an inflection point and warms us up to the idea of starting to look to build long Sterling positions against the Euro at current levels.