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GBP Breakout & Treasury Stmt Preview

By Ashraf Laidi

The breakout in GBP/USD has taken place as anticipated in last week’s piece.

What next?

Despite the renewed contraction in UK construction PMI (November’s 49.3 is lowest in three months), GBP/USD is unruffled as the Greece/Spain negative event risk is shaken off by the approved buy-back for Greek bonds and Spain’s bad bank bailout. Back to the UK, yesterday’s release of November manufacturing PMI edged up to 49.1 from 47.3, suggesting a slowdown in the pace of contraction.

Wednesday’s Autumn Treasury Statement (prelude to next year’s Budget Statement) will be watched for which additional cuts are made to fund the £5bn spending planned for education, transportation health and science. Over £1bn in additional cuts in wages, and building rentals is planned. GBP traders will welcome signs of an IMF-approved stimulus with as much as £5bn targeting growth (kick-starting construction, shovel- ready projects & road networks), while simultaneously cutting a cumulative £2.5bn to meet the rating agencies’ scrutiny.

No additional asset purchases expected from the BoE on Thursday.

GBP/USD always held above its June trendline support. The triangle, whose September 21 trendline resistance held for 12 weeks, has now broken to the upside. Closing Monday above its 55-DMA, makes for an additional positive signal in a long series of bullish developments.  Multi-time frame oscillators continue to improve (from daily to weekly & monthly). A daily close above 1.6125 will be required to extend the rise towards 1.6196 –76.4% Fibonacci retracement of the decline from the September high to the November low. $1.6225 is now within sight before mid month.

Today’s RBA decision to cut rates by 25 bps to 3.0% had STRONG AUSSIE written all over it. The decision to ease was mainly to avoid further currency strengthening rather than necessarily tackle an emerging macro slowdown. The Aussie rallied following the rate cut. The RBA has been increasingly uncomfortable with Aussie strength. And with Chinese figures improving by the week, the upward pressure would have been further magnified by RBA inaction, especially following the recent IMF decision to include Aussie in its FX reserves. A rate hold would have made task of the RBA harder in containing any unwanted appreciation.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

GBP/USD: How Elliott Wave Patterns Predicted Recent Drop Under 1.60

By Elliott Wave International

A great 6-minute video lesson in Elliott wave analysis of forex markets.

Every Friday, the editor of EWI's forex-focused Currency Specialty Service, Jim Martens, records a video update for his subscribers. Each video delivers a real-life lesson on Elliott wave application to forex markets. Watch this 6-minute video Jim recorded on October 12. Jim called for cable (GBP/USD) to drop below 1.60 in wave 5 of the developing Elliott wave sequence. Ten days later, on October 23, GBP/USD fell as low as 1.5925. Watch >> Read more.

Caution on Cable's Bullish Triangle Breakout

By Kathryn James

During the summer months GBP/USD has been consolidating to form an ascending triangle pattern,  this is a bullish pattern on the daily chartwhere after a consolidation phase that has formed a series of higher lows, we are able to draw a sloping uptrend support line from the lows. The eventual break above the horizontal resistance line has triggered a buy signal through 1.5750.

The recent low on cable on 1st June of 1.5266 to the high of 1.5780 on the 18th June gives a target of 1.6294;this is fairly close to the April high of 1.6300. I’ve drawn my horizontal support line at 1.5750 (see chart below) as this level proved difficult to break while trading occurred within the triangle range, on each break attempt the daily price failed to close above this level, highlighting the strong selling pressure and tough resistance.

On 21st August Cable’s price managed to break and close above 1.5750. This showed that the selling pressure at that level was much weaker than the previous attempts and the following day the rally followed through. Traders buying the breakout will have stops below 1.5750 so if this support should fail, the selling pressure from the stops may trigger below.

 

While GBP/USD does look bullish on the shorter term daily chart, the longer-term weekly chart signals caution. A large descending triangle has formed over the last two years; Cable needs to break above the sloping downtrend resistance line from the 2011 highs, currently around 1.6100 to remain bullish. In contrast to the ascending triangle, the descending triangle is a bearish technical pattern and the resistance line from the highs should be monitored closely if long.

 

Is Cable Overdue a Breakout?

By Kathryn James

While the market continues its volatile zigzag action in the current trading channel and the S&P edges closer to 1400, GBP/USD seems long overdue a breakout and directional move into a new trend as it continues to meander sideways across both the longer and medium term timeframes.

Longer Term

Cable continues to trade within a range adopting zigzag indecision and failing to show any directional bias for the longer term. The weekly chart shows cable currently testing a rising support line around 1.5600 of a trading channel that has been apparent since the 2009 debt crisis lows; this could provide support and push the currency pair back up to the downward sloping trend line at 1.6100. The key and significant resistance level is 1.7000, but resistance at 1.6100 then 1.6500 needs to be challenged and broken first, if cable could muster enough energy to break through these levels then a test of 1.7000 is possible. Should the upward sloping trend line around 1.5600 break to the downside then a test of the 2012 low at 1.5230 is possible.

 

Medium Term

1.5230 is the key support zone for the medium term on the daily chart, however the range has been consolidating between 1.5400 and 1.5800 throughout most of June and July. A break of 1.5400 could give rise to a test of 1.5230, on the flipside a break higher through 1.5800 could see the pair test the above mentioned resistance levels in the longer term timeframe plus the April high of 1.6300. Either way a directional break for cable could give rise to a new trending direction and offer up a nice trading opportunity.

 

BoE, Inflation &​ Sterling​

By Ashraf Laidi

Wednesday’s release of the Bank of England quarterly inflation report is expected to show another downgrade of growth prospects. 2013 GDP maybe revised to as low as 1.5% from over 2.0% in the May report. The BoE will likely reiterate its forecast that CPI to below the 2.0% target before year-end by from its current 2.4%.

The pace of decline in UK inflation is nearly identical to that during 2008/2009. CPI peaked at 5.2% in September 2008 before tumbling to 1.1% exactly 12 months later. The pattern repeated when CPI made another September peak of 5.2%, this time in 2011. If the pace of decline remains in tandem to that of 2008/2009, then we could see CPI reach as low as 1.0% before year-end.

One fundamental factor standing apart from 2008/2009 is the decline in energy prices. Unlike in 2008/2009 when oil prices plunged by over 50%, a double-dip of 30% occurred in 2011 and 2012. Yet any decline in energy is more than offset by the 36% in wheat prices and 23% increase in corn so far this year. This would offset the negative impact of slowing energy prices, especially as the sterling index is off 14% from its May highs.

BoE Balance Sheet: Now vs. then
Aside from comparing inflation and energy prices, bear in mind the BoE’s balance sheet—at a record £376 bn—is up 54% from autumn 2011. The increase was inversely related to the sharp drop in inflation from 5.2% to 2.4%. As inflation nears the 2.0% level and the UK economy shows little signs of existing recession in the midst of intensifying austerity and slowing global macro dynamics, the case for further QE should remain, as will the forward-looking negative bias on the British pound.

Technically, GBPUSD faces a rare confluence resistance, whereby the 200-day moving average at 1.5730 is near the 200-week moving average of $1.5710. The fact that both the 200 day & 200 week moving averages have acted as visible trendlines, raises the relevance of this level and reduces the market’s determination to extend bids beyond 1.5770s, near the 100-day moving average. On the downside, 1.5480 remains the required break-target by the bears to step up any fresh selling. A weekly close below 1.5480, could pave the way towards 1.5280 as the focal point for the next selling pressure.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Cable Update: US Dollar Trend Steady and Strong

By Kathryn James

With the markets flipping direction daily and volatility still at the fore, I felt compelled to do an update on yesterday’s analysis on cable (GBP/USD). I mentioned yesterday that cable was showing signs of strength on the short term hourly chart and looked to be breaking free from the downtrend on the daily chart. I was hoping to use this strength to sell into and capture a trade on the longer-term trend of cable – which is down. Unfortunately the currency pair reversed sharply and doesn’t look to be offering that opportunity as caution remains high. It is now trading below the head on the hourly inverse head and shoulders pattern and has gone back below the downtrend line on the daily chart. It’s a good example of a failed pattern and trend reversal and false breakout. (See chart below)

By adopting the strategy of waiting to trade the strongest trend, as confirmed by the longer term weekly chart, I made sure my fingers didn’t get burned by not going long. Confirmation of the strength behind this trend can be viewed (in reverse) on the US Dollar cash index chart, the index broke the neckline of a long-term inverse head and shoulders pattern in May - this was tested in recent weeks where the support line held, a rally ensued followed by a move to new highs. A series of higher highs and higher lows are clearly defined on the weekly chart as the broader trend continues to push the index closer to 90. The trend is becoming well-established and looks poised to challenge fresh highs.

 

Cable Update and Short-Term Sterling Strength

By Kathryn James

The sharp sell-off in GBP/USD during May was abruptly halted on 1st June with a nice rally from the 1.5266 lows. Since then the currency pair has consolidated in a range between 1.5780 and 1.5464. The downtrend line drawn (on the chart below) from the 30th April high has been tested several times during this period and was broken to the upside again yesterday. This break is short-term bullish for cable and a bounce higher could ensue. There are cautionary bearish signs on the daily chart to take heed to though; the price has made a lower high through this consolidation phase, failing to break the high of 1.5780 made on 18th June - this could be foretelling weakness. However, a follow through of the trend line break could see the pair break above the recent lower high of 1.5720 to reach and test 1.5800.

 

On the shorter-term one-hourly chart, cable has broken out of a bullish inverse head and shoulders pattern today, the target for this move is 1.5640, although this isn’t far away from its current price of 1.5565. This bullish momentum re-fuelling sterling could give it the energy needed to reach the 1.5720 and then 1.5800 resistance levels above.

 

Despite the possibility of a short-term bounce for cable, the longer-term weekly chart is decidedly bearish and traders are reminded that 1.5300 is not far below. The recent break of that level (1.5266) and pull back above shows it’s a strong support but each test increases the likelihood of an eventual weekly break and close below. For this reason I’m watching the bounce to fade any strength into resistance – especially if the currency pair reaches 1.5800 on overbought readings.

 

Catching a Falling Knife - 2

By Kevin Barry

In my last article I discussed  the Foreign Exchange Market, aka FX, and why it is the best market in the world for technical traders. I described why I am not a trend follower, or a fan of buy-and-hold, and why trading intraday reversals suits my personal style.

Click here to read the full report

 Kevin Barry from www.tradersandinvestorsclub.co.uk

Elliott Wave Pattern: GBP/USD

GBP/USD spot daily chart

Pattern: GBP/USD completed a double zigzag [A,B,C,X,A,B,C] in January. In an uptrend this pattern should be followed by an impulse wave, but here the rally was not impulsive, it was in three legs [A,B,C]. This suggest GBP/USD is tracing out a long term sideways pattern like a triangle.

Next move: A rally in three legs [A,B,C] back to the down trendline.

Target: 1.6000 in the short term, 1.6500 in the medium term

PIIGs Can't Rest on BRICs

By Ashraf Laidi

China is the last of the BRIC nations to be forced to ease as it cut its lending/deposit rates by 25-bps for the first time since 2008.
1 week after Brazil slashed rates to record lows and 1 month after India cut its repo interest rate for the 1st time in 3 years, China finally caves in.
Chinese 1-yr savings rates are now deeper in the red below inflation as today’s PBOC rate cut in the 1-year deposit rate to 3.25%, places it further below the inflation rate of 3.4% to a real deposit rate of -0.11%, further eroding depositors’ savings. Such could be a step to encourage savers to spend and even to invest in the stock market-as has been known to be among the agenda of policy makers during the 2007-8 crises.
Last week’s chart (upper right) highlighted the BRICs policy interest rates seeking the inevitable downward path of 2008-9.

In another sign confirming that this is not 2011 or 2010 when Eurozone market woes were alleviated by the BRICs, Brazil’s central bank made its 7th rate cut, to take its selic rate to a record low of 8.50% as part of the government’s efforts to call on private lenders to reduce interest rates on various forms of credit/financing for business and individuals. Brazilian rates fallen by 350-bps over the last 10 months in an effort to stimulate the sharp slowdown in growth. GDP q/q hit 0.3% in Q4 2011, from 1.1% in Q4 2011 and 2.8% in Q4 2010.

Last month’s cut in the Reserve Bank of India’s repo interest rate was the first since 2009. The RBI has already cut its cash reserve ratio requirement (CRR) twice this year, which encourages banks to lend and hold fewer funds. The cut in the repo rate (principal interest), is aimed at driving down the cost of funds across the board. The repo rate was raised 13 times from early 2010 to last October, aiming to fight off stubborn inflation.

Bernanke’s relatively guarded testimony towards giving any policy signals reflects the possibility that Fed economists are in the process of determining their latest forecasts post-May NFP and Chicago PMI in the face of stable ISMs and housing figures. Since markets have concluded that any further Fed QE would be principally aimed at containing a Eurozone event risk, the US central bank may be waiting for the final plan of action from ECB/IMF/EU before working out its part of the coordinated action.
The current risk-on environment (courtesy of market expectations of central banks) suggests a EURUSD recovery towards $1.2720s, GBPUSD to as high as $1.5660 and AUDSD towards $1.0130s remains a corrective phase, part of a longer term impulsive down wave.

Gold’s recurring inability to surpass its 55-day moving average since mid March despite falling yields reflects the ongoing fear factor (selling holdings to counter losses) as well as eroding confidence that any new quantitative easing may not be sufficient, hence the notion of diminishing returns voiced by Bernanke last year ahead of Operation Twist.

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index