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British Pound Lining up for Significant Turn – What Could Warn Us?

By , Quantitative Strategist
28 March 2014 22:18 GMT
British-Pound-Lining-up-for-Significant-Turn--What-Could-Warn-Us_body_Picture_5.png, British Pound Lining up for Significant Turn – What Could Warn Us?

Fundamental Forecast for Pound:Bearish

The British Pound finally showed signs of life as it finished the week at its longest-consecutive daily rally in two months. Yet the Sterling remains below important price levels, and a number of technical factors favor GBP weakness into a big week for forex markets.

A relatively empty UK economic calendar will leave the GBPUSD and EURGBP to trade off of a highly-anticipated US Nonfarm Payrolls report as well as a European Central Bank interest rate decision in the days ahead.

The past two months of British Pound trading have been marked by a steady decline in day-to-day price swings, and indeed we’ve seen the US Dollar stick to similarly tight ranges across the board. Yet the pickup in event risk has pushed 1-week volatility prices to their highest levels since mid-February.

It can’t be pure coincidence that the February surge in vols likewise coincided with fresh multi-year highs in the British Pound and important lows in the Dow Jones FXCM Dollar Index. To that end it will be interesting to watch if history repeats itself—particularly as our Senior Strategist points out that the GBPUSD is at special risk of reversal lower, while the US Dollar itself is setting up for something big.

Correlations between the British Pound and traditional drivers such as interest rates and the FTSE 100 remain weak by historical standards. The breakdown makes the next catalyst less obvious, but we suspect that any big shifts in the US Dollar may dictate moves across the board.

We’ll keep an especially close eye on market reactions to the US Nonfarm Payrolls report and effects on the GBP. The signs of potential reversal are becoming too difficult to ignore, and it should prove to be an especially interesting week of British Pound trading. - DR

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28 March 2014 22:18 GMT