It wasn't the breakout the market would have expected. After the Bank of England cut its benchmark lending rate another 50 basis points to a record low 1.00 percent, the British pound would actually find a bid that would force the currency through notable resistance forged in many of the crosses. Is this a false or genuine breakout? What is the risk / reward in jumping on the potentially, trend-defining shift? Our DailyFX Analysts weigh in on the pound in general and offer their favored sterling pick.
Chief Strategist - Antonio Sousa
My picks: Remain Short EUR/GBP
Expertise: Economics and Behavioral Finance
Average Time Frame of Trades: 1 month
I have been short EUR/GBP since the beginning of the year on speculation the British economy will outperform the euro zone in 2009. In one hand, the Bank of England has been busy promoting growth by easing its monetary policy. For instance, today, the Monetary Policy Committee of the Bank of England cut rates by 50 bps, bringing the overnight rate to the lowest level in the bank's more than 300 years of history. On the other hand, Jean Claude Trichet seems to be sleeping in top of a pillow full of credit derivatives dynamite. This morning, the European Central Bank kept its the key interest rate unchanged at 2.00% and the governing council of the ECB continues to underestimate the destructive power of the current financial crisis.
Currency Strategist - John Kicklighter
My picks: Short GBPJPY
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
It seems almost a typical occurance considering the currency market's reactions as of late. The Bank of England cut its benchmark lending rate to a new record low this morning and yet the pound has put in for a significant rally. This is most likely due to the fact that global interest rates are quickly falling to zero; and the MPC's action at this point are now more important in that they are aimed at jumpst starting growth while yield demand has been pushed to the wayside. This boost in optimism for the sterling is certainly not good for my GBPJPY short setup from last Thursday. A steady falling trend and confluence of resistance all around 130.00/75 has clearly been pushed. An initial target of 400 points or less would have taken profit, but the a true reversal has clearly been undone. This week, as the general sentiment surrounding the pound has clearly shifted, I am scanning the significant breakouts throughout the crosses to garner whether this is a genuine break or a false break? While GBJPY, EURGBP, GBPAUD and GBPCHF have all made broken through resistance; I would still prefer confirmation from the defining GBPUSD pairing. If this major fails to break a more notable level of resistance and pulls back; it certainly has the tout to pull the crosses down with it - regardless if they have broken higher or not.
The weekend is fast approaching, so a confirmed breakout or reversal is vital to determine the pounds overall direction. Technically, I would consider a push through the 50-day SMA 1.4690 and the major descending trendline (that goes back to the October 30th swing high) at 1.4775 reasonable confirmation. If this doesn't happen naturally through a strong market-wide bid for the currency that leaks over into GBPUSD over night; then I would suspect tomorrow's NPFs could be key. This event risk is the top volatility generator for the US dollar and could therefore catalyze just such a move. A higher time frame close above this range of resistance would be best confirmation; but an aggressive approach could look for some discretionary cue. Stops should be wide though as breakouts are generally volatile. A short-term rising trendline offers a good benchmark.
Currency Strategist - Terri Belkas
My picks: Long GBP/AUD on a break above 2.29
Expertise: Fundamentals combined with technicals
Average Time Frame of Trades: 1 day - 1 week
While the Bank of England cut rates in line with expections to 1.00% and statement that the Monetary Policy Committee's past reductions to the Bank Rate would in due course nevertheless have a significant impact, it appears that the BOE may leave rates steady going forward. This leaves some upside potential open for the British pound, and focusing on GBP/AUD, I'm looking for a break above the confluence of 100 SMA and fibonacci resistance (the 38.2% fib of 2.7105-2.0236) at 2.2805/58 as a buy signal. Potential targets include former resistance at 2.3500, as well as the November 20-21 highs near 2.4253-2.4325.
My last GBP trade was on last Thursday, when I was looking for an opportunity to buy GBP/USD. The pair didn't hit my buy level until Monday morning, but subsequently reached both my initial and secondary targets on Tuesday.
Currency Analyst - David Rodriguez
My picks: Flat the GBP/USD
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks
To say that I'm taken aback by GBP volatility is an understatement. My trading style involves identifying developing medium term trends and trading accordingly. Given such absurd swings in the Sterling, I will continue to stick to the sidelines until the technical and fundamental picture clears up. The obvious temptation is to trade on a shorter-term basis, but this has typically not worked in my favor.
Currency Analyst - Ilya Spivak
My picks: Short GBPUSD (pending)
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
GBPUSD is showing signs of topping out with a Doji candlestick ahead of resistance marked by a falling trend line established from swing highs in September. Look for a bearish close on the current candle as confirmation to get short, eyeing a move back to January's lows near 1.35.
Currency Analyst - John Rivera
My picks:Long GBP/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 2-4 Days
My long GBP/USD call last week would have been good for 250 pips after the pick. However, there was a pull back after the initial test of the 20-Day SMA which led to profit taking, but breaking above the technical barrier since has led me to add to my position. Although, I remain bullish on the pair, the 50-Day SMA at 1.4675 remains as formidable resistance and until I see a break above that level I will refrain from adding fresh positions.
Currency Analyst - David Song
My picks: Exit Short GBP/CHF
Expertise: Fundamentals and Technicals
Average Time Frame of Trades: 2 - 10 Days
The GBPCHF surged higher following the 50bp cut by the Bank of England as market participants anticipate the central bank to keep rates on hold going forward, and the rally in the British pound ended up triggering my stop at 1.6900-10 (50.0%Fib). As a result, I will stay flat on this pair for the time being until we get a clear signal on where the pair will be heading over the coming months.
Currency Analyst - Joel S. Kruger
My picks: GBP/JPY Long @131.00, for 141.55; stop @124.90
Expertise: Technical Analysis
Average Time Frame of Trades: 1-3 Days
The market has been confined to an intense downtrend over the past several months with the cross rate trading to fresh life-time lows by 118.85 on 23Jan ahead of the latest minor bounce. However, recent price action has been quite constructive with the market putting in a fresh higher low on each day in the preceding week and refusing to rollover after putting in a bearish reversal day on Monday of this week. Additionally, it is worth noting that the lifetime lows by 118.85 have directly coincided with former trend-line-resistance (30Oct high) now turned support. Although weekly studies remain in oversold territory, the weekly RSI looks to be on the verge of a positive cross for the first time since March 2008 where we saw a 20 big figure move to the upside. Positive crosses in the RSI on the weekly chart have been few and far between over the past 20 years and each time, the bullish signal has yielded a major shift in the trend. The one exception was March 2008 where we still saw significant upside (aprox. 20 big figures) before bear trend resumption. As such we recommend looking to buy the cross on a break above the previous weekly high.
Fundamental Catalyst - The major drivers of price action on this cross over the past several months have been risk aversion and ongoing deterioration within the UK economy. However, we contend that we are now at an inflection point after starting to see some early signs of a potential shift in the broader market sentiment and UK fundamentals. While global equity prices continue to show weakness, there is no doubt that the rapid declines seen in 2008 have abated and deferred to a more consolidative form of price action. Additionally, UK data over the past few weeks has started to do something that has dramatically improved investor sentiment towards Sterling. Data out of the region has started to come in better than consensus estimates, often indicative of a base. As such, we view these developments as net positive for Sterling/Yen and combined with the oversold technical outlook, should make a compelling case for the establishment of fresh long positions by historical lows.