The ebb and flow of risk appetite has been a frequent driver for the currency market for months; so it is not too much of a surprise to see the sterling (associated with high risk) to rally this morning against the US dollar, Japanese yen and Swiss franc. However, this is not a driver that is specific to the sterling; and what's more, the dynamics of risk sentiment and how it moves the currency market has recently been in flux as fundamental traders refocus their attentions on broader economics and the potential for growth later in the year. Will risk appetite hold provide the pound more strength or is this run destined to be short-lived? Our DailyFX Analysts offer their picks from the sterling crosses and their outlook for the currency through the short-term.
My picks: Short EUR/GBP
Expertise: Global Macro
Average Time Frame of Trades: 1 month
I expect the British pound to appreciate against the euro on speculation the European Central Bank will cut rates by 50 bps during its next monetary policy meeting on March 5. Price increases, which the ECB aims to keep under 2 percent, seem to be contained and lower interest rates could be needed to prevent the sixteen economies of the euro-zone from falling into a severe recession. The market has been volatile but I will try 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.
My picks: Long GBPCHF
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
The pound has two, primary fundamental trends working against it. First of all, the UK economy is expected to experience the worst contraction this year amongs the major industrialized nations. Second, the BoE's dovish policy approach has quickly deflated the reward component of a risk/reward situation where the scales were already tipping towards fear. These will be significant currents to fight; but then again, how far must the pound drop before it is fairly valued against a spectrum of currencies whose interest rates are also approaching zero, where recessions are the norm and financial markets are struggling. While this doesn't necessarily give reason to believe in a long-term rebound in the pound, it calls for serious thought and likely considerable bullish retracements. This line of thought was what led me to the long GBPAUD position I laid out last week. This setup has since triggered; and is floating a profit; though follow through has been lacking after the intiial rally earlier this week. I will move my targets to yesterday's highs and my stops have been pulled up to breakeven. In looking for a GBPCHF position, I am leveraging my exposure to long pounds; but this is offset by shorting a high risk and low risk currency with an essentially riskless GBPAUD left to its own devices. For my pound positoin this week, we have a general pickup in risk appetite that has worked against the dollar and franc; but a lack of fundamental drivers could bow the move to technicals; so it is important to develop a reasonable strategy.
Through this mornings price action, it seems GBPCHF is accelerating into its bullish reversal. However, there is still considerable resistance to push through. Therefore, I will take a small long position at market (1.6880) and building my position when there is confirmation that the market is indeed moving through the pivot and 50 percent Fib retracement (of the Nov-Dec) bear wave falling at 1.6925. With a lower time-frame candles close above this level, I will build my position to full-size and set my stops below the short-term (seen on the 60-minute time frame) rising trendline. At the same time, technicals show the potential for resistance to quickly come in and curb any significant rally momentum around 1.75 where a major pivot stands. Therefore, targets should be set within this range - and the closer they are to entry - the more quickly they will be hit. For those that think we are developing a major trend reversal from this slow turn, a longer-term position could be ventured with a stop below 1.65 and target that is set nearer to 2.00. I will not take that kind of speculative risk however and I need better confirmation of a trend change.
My picks: Long GBP/USD on Drop to 1.4345
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 Day - 1 Week
Wow, looks like when I'm wrong I'm really wrong. I was pretty convinced that EUR/JPY would hold below a trendline on the weekly charts that has served as resistance since August 2008. Instead, the pair has broken higher, which is actually a buy signal based on my pick from February 11.
Meanwhile, my pick of the week from Monday was to sell GBP/USD on break below 1.4150, which never ended up getting triggered. Our focus today is on the GBP crosses, and while I'd like to take advantage of the currencies strength, I'm wary of buying on such sharp rallies as moves like this are prone to retrace at least a little bit. As a result, I like GBP/USD to the long side on a drop to the 50% fib of this morning's rally, but I would first wait for signs of consolidation above that level to avoid getting stopped out immediately.
My picks: Flat the GBP/USD
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks
Effectively rangebound price action in the GBP/USD has made it impossible to latch on to any worthwhile trends. It is subsequently unsurprising to note that I remain flat the pair; I have not done well with range trading, and there is no sense in exiting my comfort zone just for the sake of trading. All else remaining equal, I would like to eventually go short the GBP/USD--in line with my Top Trades for 2009. I will watch for a better entry point and for price action to show clearer bias.
My picks: Remain Short EURGBP
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
I entered short EURGBP at 0.8983 as prices signalled a double top below 0.9080 with a Hanging Man candlestick. The pair has sold off considerably, down over 2% to date (spot is at 0.8776 as this is being written). Remain short, initially targeting 0.8678 near the previous swing low.
My picks:Long GBP/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 4-8 Days
My short GBP/USD was a lesson learned for me as I have been bullish the Pound and I let the sharp decline on the day change my bias. In my defense the BoE painted a very dismal picture and the threat of further rate cuts and quantitative easing is more than enough justification for a change in sentiment. I think the fact that the U.K. has lagged the U.S. regarding the housing collapse, economic contraction and monetary policy, markets were fairly confident that the BoE would take rates to near zero which got priced in to start the year. Therefore, we are seeing prices return to the 1.4500 -1.5500 range which may be a more appropriate valuation. The 50-Day SMA at 1.4588 is in sight with the 2/9 high of 1.4988 as the next likely resistance level.
My picks: Stay Short EUR/GBP
Expertise: Fundamentals and Technicals
Average Time Frame of Trades: 2 - 10 Days
The EURGBP pushed to a low of 0.8637 last week, which failed to reach my target for 0.8580-90 (78.6% Fib), and as the European Central Bank is expected to ease policy further in March, I will continue to hold my bearish outlook for the pair. As the Bank of England adopts quantitative easing to manage monetary policy, the extraordinary efforts should help to mitigate the downside risks for growth, while increased turmoil in the euro-region could lead the ECB to take an aggressive approach to stimulate the economy as the outlook for growth and inflation deteriorates at a rapid pace.
Joel S. Kruger
My picks: Pending Sell GBP/USD @1.4580 for 1.4055 Objective, Stop @1.4715
Expertise: Technical Analysis
Average Time Frame of Trades: 1-3 Days
With the USD showing so well bid over the past several days, it is no surprise that we have been seeing a bounce into Thursday to allow for some form of a relief rally. While Sterling has held up on a relative basis, the currency pair still remains locked in a very well defined downtrend and should continue to be sold into rallies. We will once again utilize the Average True Range (ATR) indicator to help target an ideal entry point for a short trade. The ATR in Cable comes in at 305 pips. Based off of the current daily low of 1.4205, this would project a daily high by 1.4510. However, there is no significant viable short-term resistance at 1.4510, and given the ability for this pair to often overshoot its ATR on reversal days, we will choose an entry point for our short trade a little higher up by 1.4585 which coincides with the 50-Day SMA. The 50-Day SMA has proved to be a formidable cap on rallies throughout much of the downtrend and we expect that it will continue to do so, particularly after seeing a 380 pip rally in the day. Recommendation to be Removed if Entry not Hit on Thursday.
Fundamental Catalyst - The USD rally has stalled out on Thursday with much of the price action being driven by talk of more efforts in Europe to stimulate the local economies. Reports have indicated that Germany will be prepared to support the broader Eurozone economy should any individual countries within the region find themselves in a position where they can not refinance their own debt. While this is certainly a welcome development and necessary step in attempting to ameliorate the dire economic situation, it should by no means be a signal for increased risk appetite and a flight from safety back into higher yielding and more risky assets. We therefore discount the current rebound and attribute the move as more of a necessary correction, most probably originating from profit-taking from shorter-term speculative accounts.
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