It has been only couple of months when financial press was lamenting the fate of US dollar. All time or multi year low against many currencies, credit crisis, housing market in shambles, nightmarish deficit. Seemed like every news hitting the wire was worse than the one before. Tragic story. And the outlook, well, just as bad.
What a difference two months make. USD has staged impressive rally across the board. Large moves against CHF, AUD, EUR, NZD and GBP seemed to quiet the critics and reverse general sentiment. There hasn't been many bullish news for the dollar, as much as a lot of bearish developments for the other currencies. Falling commodities prices and signs of world wide economic slowdown seemed to take the heat off of the Dollar. The new "whipping boy" of Forex markets is, for the moment, British Pound.
Just how bad have things gotten for the Pound? GBP-USD lost 8.2% percent in August. This is the biggest monthly drop since October 1992, when the fall was just a little worse at 8.6%. And we all know just how memorable that event was. UK left European Exchange Rate Mechanism which resulted in a huge one day Sterling tumble. That is when George Soros "broke" the Bank of England and reportedly made $ 1B in one day, something that is stilled widely discussed in all financial circles.
This time around there has not been any single event, but rather a string of news of economic data getting from bad to worse. Figures reported in August showed house prices fell at their fastest pace since 1991, while retail sales plunged to their lowest level in 25 years. These are pretty bad numbers by anyone's standards and they culminated in news that economic growth ground to a halt in the second quarter.
This raised expectations that the Bank of England would move to cut interest rates during next meeting, further undermining the Pound's appeal to investors. And it looks like investors have been loosing faith in Sterling rapidly. Over last couple of weeks GBP sell off was not confined only to its pair with Dollar, but broadened significantly. Just over last 10 trading days pound fell 1000 pips against JPY, 500 pips against CHF, while CAD gained 600 pips. To top it all off, EUR-GBP is on a brink of all time high.
We don't know what BoE is going to do, but current outlook for the Pound is not very optimistic. That is, at least, general market sentiment as reported by financial media. We all know, however, that market participants, as a group, tend to be collectively wrong when markets are reaching the extent of their moves. Just look two months back and USD.
Current Sterling situation isn't exactly like that. We are not at multi year price extreme, but rather an intermediate move bottom, as measured on weekly charts. Let's take a closer look at GBP-USD and use it as a proxy for all Pound pairs. After an initial sell off from 2.1100 to 1.9400, there was a period of consolidation. It was followed by this latest leg down, which reached 1.8200. This is probably the extreme of this move.
Chances are price will consolidate in this area, contained within roughly 1.8500-1.8000 range. This should take few weeks. After that, breakout above/below this range will likely indicate direction of next price move. Analysts are predicting continuation of the move down, to about 1.7200, but given their recent track record, appreciation to 1.9200 is more likely.
No matter what happens, Pound is currently at very important juncture. Even if you missed most recent moves, just get ready and be patient. Next few weeks will probably provide very good trading opportunity, with a move large enough, that, if caught, can easily make trader's year.
| Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on http://www.spectrumforex.com. Spectrum Forex LLC offers numerous services to individual traders. He also publishes trading blog http://www.fxmadness.com. With questions and comments e-mail him at kulej@spectrumforex.com. |
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