Tuesday, May 27, 2008

British Pound Forming A Bottom



Out of the four major currencies that I follow (yen, pound, euro and swiss), the British pound is clearly the weakest currency. However, if you look closely at the above chart you will see something that could be of interest to you.

Above is a weekly chart of the British Pound and in the lower pane is the net position of the commericals. You'll notice the pound looks as though it is trying to establish a double bottom which coincides with support (2004 high).

In the lower pane you'll notice the commercials are holding their largest net long position in years which in my opinion is very bullish for this currency. The last time the commercials were this bullish was back in 2003 and 2006 and that kicked off a major rally. When you combine the potential double bottom with the massive net long position that the commercials are currently holding, it leads me to believe that the British Pound will rally.

I don't have any buy signals at the moment but I am definitely going to keep my eye on this currency and look to buy into strength.

7 comments:

Anonymous said...

pound against what?
on a fundamental basis, that sure sounds strange

Kevin said...

Pound against the U.S. dollar...

kk said...

Kevin,

Any target on natural gas?
It's being making new high.
How about your view on oil?
Thanks in advance!

Brendan said...

GBP/USD is the most difficult major to trade, its too volatile, and both UK and US economy are weak. Hard to bet which is weaker.

Cire2222 said...

Interesting chart. Do you have any thoughts on the relative strength in the USD index compared to the strength in Oil. I have noticed gold and dollar have detached themselves from Oil, to me it signals something brewing.

thelonelytrader said...

You always present a very clear case for the ideas you present. This one is no exception. I enjoy your comments on currencies, because it restores my faith in the idea that any one individual can competently trade across several asset classes.

A couple of things.

Technicals: It does look as though Cable is set to break out of the current small flag formation (dailies/4hr) to the upside. This is happening as the wedge on the weeklies is also being breached to the upside. This confirms your idea of the double bottom and the net-long commercials undergirding current price levels. Several other majors are ahead of the GBP in terms of their gains against the USD, for obvious fundamental reasons. A break of 2.0000 would clarify the near term technical picture, but the weeklies require more -- perhaps a sustained break of 2.0400 with additional evidence that this level would serve as solid support. (So trade the pullback to this level?) I would say only this -- the double bottom is not complete, and there is significant resistance above. Open interest is being checked. Vols are dropping. If anything, the GBP should strengthen against the Euro in the coming weeks/months.

Fundamentals: I think the subprime stuff has pulled down this currency a bit too much and I side with King -- the GBP is a sound currency and will remain so. On the other hand, I think the GBP is overvalued agaisnt the USD on pure fundamentals. Given the current interest rate and capital flows pictures, I'm kinda biased for more ranging going forward for the Cable -- maybe two to three months.

Across markets, it will be interesting to see how the rebound in gold, oil and other commodities will influence GBPUSD valuations over the next couple of quarters, and how other FX market movers will respond as well.

But I don't trade on these time horizons...not even close.

Brendan said...

Tonight there is a lot of US data announcement, good to buy OUT for binary trading.

OUT is similar to strangle for options.

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