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For the past four trading days, the British pound has been stuck in a 200 pip range against the U.S. dollar and a 115 pip range against the Euro. However the bottom of the range in both the GBP/USD and EUR/USD have been broken, leading currency traders to wonder if the larger range will be tested as well. For the GBP/USD, this would be a break of the 1.6750 or 1.60 level and for EUR/GBP, the levels to watch are 85 and 87 cents.
Despite the 1 percent drop in the EUR/USD today, the GBP/USD has been relatively unchanged. One month GBP/USD volatilities have fallen to the lowest level since September 2008. Such a sharp contraction in volatility usually suggests that a breakout is imminent. The only question is, in which direction. Here are some sound arguments in favor of an upside or downside breakout.
Arguments for upside breakout in GBP/USD
– Housing market continues to show signs of stabilization, house prices rise for first time in 2009
– Break of 86 cents in EUR/GBP could lead to GBP buying
– Ascending triangle formation
– Moving averages are in “perfect order” which favor a new uptrend
Arguments for downside breakout in GBP/USD
– Risk appetite is waning, which could drag all of the higher yielding currencies lower
– U.K. Banks could be set for losses as clock ticks on GBP300bn commercial property loans
– Q2 GDP was very weak
– Risk of Bank of England increasing asset purchase program
– GBP/USD breaks 4 day low
Given the arguments, we believe that the chances of a downside breakout is greater than an upside one. Based upon the following chart, a break of near term support should come soon at which point, the next level or support or resistance would be the highs and lows of the past 2 months.
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Hi Kathy,
Base on currency changes, I assume that British Pound will becomes strong than before.
Cheers,
Forex Automatic Trading Robots
Hi,
The pound has been ranging a lot and hasn’t been as enthusiastic about getting out of its range as other currencies such as the Aussie Dollar or some of the EM currencies. What’s driven the Pound up to its current levels at this point was its “oversold” status from last year’s unwind and also the perception that the Bank of England has been proactive (like the US) with its quantitative easing program to flood the markets with liquidity, thus making it a likely first candidate for recovering from the recession. However, despite good news like housing coming out, the GBP/USD has not been able to climb to higher levels. This could be a reflection of a market perception that the UK is getting into deep debt troubles like the US. I’d be curious to know what other people think.
http://www.thegestaltshift.com – a blog for thinking outside the box to make currency trades
The breakout should be to the downside. But who knows, maybe the last move up before the stocks resume the slide towards March lows as well as before the return of the deflationary- risk aversion- trade? Come on, a ‘stupid move’ : change hot pounds to dead bucks!