A GBP Play on the Bubble Burst

• faithmight
• November 29th, 2009

Analysts have been talking about a possible real estate bubble bursting in the Middle East, particularly Dubai and Abu Dhabi, for over a year now. So for active forex traders, Wednesday’s news that Dubai World signaled possible default by asking for a payment extension, was writing on the wall. Now that the markets have had a chance to react, we can look for long term implications by watching for certain price behavior.

Remember back in October we had calls from both Goldman Sachs and BNP Parnibas for the GBP to strengthen to 0.84/85 level.  At this time, the economic recovery was taking hold, risk appetite was picking up, commodities and equities began an unbelievable rally, and the GBP strengthened from 0.9410 to 0.8831 versus EUR. BUT! Dubai, I believe, throws a big monkey wrench in GS call for 0.8400. This is why I like “surprises”. Whether they are pre-meditated, leaked, or released, they change the game for EVERY BODY involved – all market participants, all traders. The entire market sentiment could change now and bring with it possible changes in trends and correlations. For example, I expect equity markets must be bracing for a huge fallout come Sunday/Monday market open because the possible fallout that could be felt in the financial sector when these huge defaults play out.

Taking a look at the $EURGBP daily chart, watch the 0.9000 level to see if a resumption of the ST down trend will occur.

I think we can take the 50% breach with a grain of salt. That was the knee jerk reaction to risk when news of Dubai finally rumbled through to the markets. A tremendous buying opportunity for those paying attention already knew that. Kudos to you! For those of you who were late, there is still a terrific opportunity if you change your time frame to the hourly chart.

This chart is essentially a picture of the GBP’s reaction to news that it may be revealed, particularly during 3Q/4Q earnings season, that British banks are the big losers in the bursting of the Dubai bubble. We are currently in the consolidation of the first bullish wave on the ST chart. A second bullish wave targets resistance at 0.9238 (Oct 26 high) and now some resistance at 0.9132 (Friday’s high). Finding support at 0.9000 is a major bullish development and the 0.8975 low was neither a convincing nor sustainable break of the 0.9000 level.

However, if we do see a break of 0.9054 the 50% Fibo on the hourly chart, expect a move to 0.9000 or at least a decent attempt. I’m not sure how strong the GBP can really rally with the BoE trumpeting a clearly dovish policy. Economic data may provide buying opportunities on a day-to-day basis but any disappointments support the current uptrend on the daily chart. The break of 0.9062 was a major bullish development has it marked a break of the downward channel where we were consistently met with lower highs and lower lows on the daily chart.

This week ushers in December, an interest rate decision from the European Central Bank, Eurozone GDP, and US non-farm payrolls. We will also see just how the markets take the bubble bursting news out of Dubai. Be alert fellow traders – there are a lot of pips to be had. Trade what you see, not what I think.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: bubble, debt, Dubai, EURGBP, GBP

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