Downward momentum slowing, Sterling to rebound?

Pound Sterling had a dismal second quarter.

The currency saw its value collapse across the board against most other major FX pairs. Against the US Dollar, for example, the rate slumped from 1.310 to 1.245 despite increased expectations of a rate cut by the US Federal Reserve during the period.

Similarly, Sterling-Euro nosedived from 1.175 all the way to 1.100 even though the ECB is assumed to be tilting towards a major easing program (see Featured Chart).

So the question now is whether Sterling’s depreciation is overdone. True, UK’s headline macro statistics are poor and investors are raising the probability of a recession in the country soon. Adding salt to the wound is Brexit, a process which remains chaotic and unpredictable. But have the bulk of these negativity been priced in? Possibly.

Look at GBPUSD. Its southward price momentum is slowing near 1.240-1.250. Three attempts at that floor during June-July has not made much progress. Whenever an instrument tries several times to resume a trend – and fail, I can only assume that a counter-trend move is building. (A bit like TLT’s failed uptrend reassertion that I highlighted last Friday). Counter-trend moves are often violent because everyone is holding the same position and are eager to exit simultaneously.

Therefore, I would be wary shorting Sterling from here given the increased chances of a counter-trend rally. One technical development that would negate this view is a big downward dynamic that re-affirms Sterling’s medium-term downtrend.

Near-Term Floors

GBPEUR – 1.110

GBPJPY – 135.0

GBPCHF – 1.235

GBPCAD – 1.635  (a ‘one-way street’ decline from 1.770, oversold beneath long-term trend)

GBPAUD – 1.780


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