Stability of GBPUSD Range Depends on Dollar’s Strength

Trading Tip – The dollar has already forged what looks like a key breakout against its primary counterpart, the euro. Considering the liquidity behind this pair and its reflection of underlying fundamental trends, EURUSD’s breach of 1.48 could be considered a sign of strength for the dollar itself. The greenback’s pull is a concern for all of the majors including GBPUSD; but the correlation across the pack is not absolute. Momentum can develop behind the oversold dollar; but for some pairs; price action has been less consistent in depressing the single currency and the fundamental considerations are somewhat different. For the sterling’s part, the currency has been severely depressed by a fundamental outlook that encompasses a stalled recovery and extremely loose monetary policy stance. However, the UK will eventually find the worst has come and gone; and when that point is reached, the overcast that has prevented bullish forecasts and the return of speculative capital will open the door for competitive appreciation. Yet, this change can come tomorrow or next year. In the short-term, event risk is a volatility concern. The Treasury’s pre-budget statement and BoE rate decision can have a significantly impact on price action. In response to this risk, we will cut position size and cancel all open orders by tomorrow.

Event Risk for the UK and the US

UK – Between a dense economic docket and leveraged concern surrounding general risk appetite, the British pound is looking at a significant threat of volatility and meaningful trend generation over the coming week. Already, the currency is responding to the market-wide slump in sentiment; but the sterling is not the typical member of the high-risk group. With a recovery that has been consistently delayed and monetary policy that is still tilted towards expansion; speculators have aggressively discounted the pound to account for its shortcomings. However, this adjustment may have already prepared the currency for the worst. Consistent signs of growth or a warning that interest rates and quantitative easing can be adjusted independently could significantly alter this currency’s standing. As for scheduled event risk, the calendar is well-stocked. Monetary and fiscal policy is the primary concern for this week with the BoE set to announce its rate decision and the Treasury scheduled to release its pre-budget report. Though less provocative, other indicators like jobless claims, consumer-level inflation and physical trade are all notable releases.  

US – There is a significant round of scheduled event risk for the dollar over the coming week; but the greenback’s primary concern remains the bearing on risk trends. While the case for the dollar’s appeal as a safe haven is debatable; the fact that the currency appreciates when risk is on the decline is not. Some key asset classes have not produced a tangible trend reversal in the past week (like equities and gold) while others have already backed a reversal (EURUSD and crude). Should all – or most – of the critical securities follow up on the break; momentum behind the dollar’s advance will accelerate markedly. In the meantime, upcoming data is notable; but likely limited for impact. The FOMC rate decision leads other common drivers like retail sales, confidence and trade.