Cable, Is Third Time The Charm?

• faithmight
• January 11th, 2010

The $GBPUSD actually ended the first trading week of the year above 1.6000. To close the week above this major whole number and psychological level is a very bullish development no matter how you slice it. And then there is also the adage that January trading sets the tone for the year and the first week of January sets the tone for the month. So this close makes things very interesting for this GBP/USD bear.

We had a lot of developments in the first week of 2010 that has actually shifted the fundamental landscape in favor of $USD weakness. I think the most impactful, and perhaps the most subtle, is the contrast between the US and UK central banks. While the BoE has remained steadily dovish, not moving interest rates or expanding QE in now 3 months; the Fed on the other hand has SHIFTED tone (once again) from hawkish to a much more neutral, and arguably, dovish stance. Check out the audacity of voting FOMC member Bullard in Shanghai as the markets open for this week. One has to wonder if the strong $USD policy is now out the window. Employment is still hurting in the US with the unemployment rate still above 10%. The possible implications of a contraction in the economy now due to structural unemployment doesn’t seem to bode well for the $USD. The $USD will suffer for it but how much? Let’s look to the charts for that answer.

Cable bears need to be very aware of the 2 red circles. The higher lows made on the daily chart signal a potential reversal bullish wave could be in the works. As price rallies, with new highs already made at 1.6192, attention turns to 1.6250 large quarter. It is no wonder that we find this level to be a significant area of resistance as circled in purple. A price probe of this level will mark the third attempt higher making breakout to the upside more probable. Even if price does, once again, find resistance at 1.6250 and heads back towards 1.6000, a higher low being made would not be out of the question. Price has yet to break ST support at 1.5801, much less the anticipated MT support level at 1.5701. The whole number at 1.6000 could become major support on a third failure of 1.6250.

Checking out the daily chart from a more zoomed out perspecitve, we are still in a very over-extended down trend. Consolidation is natural after such a bearish run. A reversal is not likely until price makes a good attempt at 1.6409 high made back in December 2009. Also consider that despite expectations, the fundamentals are more dismal for the $GBP than for the $USD so price could very well head lower. However, increased risk appetite may keep $GBP supported right now as other economies like Australia and China continue to surprise with their economic resilience. Increased risk in the markets supports sterling against both the US dollar and and euro.

Watch the calendar this week. The European Central Bank (ECB) delivers its interest rate announcement this week and with it a press statement from ECB President Jean-Claude Trichet. It will be interesting to hear from Trichet in light of sovereign debt issues, increasing commodity prices, a mixed-to-positive economic picture domestically, and increased global demand in other economies. Perpetrated euro weakness could change the $USD weakness story as the $EURUSD is the main component of the $USDX. US trade balance, industrial production, and CPI will be watched to see if the economy is really as bad as the Fed thinks. UK industrial production, trade balance, and GDP will be compared to see which economy is better. Watch price action and be mindful of new positions on these days.

Be patient, consider your time frames, and 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: $USD, $USDX, GBP, GBPUSD

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