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Strong & Weak: British Pound Outperforms

Strong & Weak: British Pound Outperforms

Jeremy Wagner, CEWA-M, Head of Education

Talking Points:

-British Pound has been the best performer over the past 3 weeks

-GBP to USD pair showing an extreme SSI reading suggesting further gain for Pound

-Buy British Pound Currency Basket

The British Pound has been in a broad based rally for more than 3 weeks and has easily earned the top spot in this week’s strong and weak analysis. The Sterling has been the only currency of the 5 main currencies to gain ground in each of the past 3 weeks against a basket of currencies.

Forex Strategy: Matching Strong versus Weak

CurrencyUp ArrowsDown ArrowsChange From Last Report
GBP70Higher 1 ranking
CHF61Higher 6 rankings
USD42Lower 2 rankings
EUR42Higher 2 rankings
CAD34Down 1 ranking
NZD25Down 3 rankings
JPY16Down 1 ranking
AUD07Down 1 ranking

Chart created by DailyFX EDU Robert Warensjo

Trend following is one of the oldest strategies in trading. Since the Pound Sterling has clearly been in a strong advance, trend traders will look to buy strength as trends can sometimes continue for quite a while.

When comparing the price of the exchange rates relative to their 200 period Simple Moving Average, the Sterling trend is the cleanest and is now considered the strongest currency according to the Strong & Weak analysis.

Forex Education: GBPUSD at the top of a Trend Channel

(Created using FXCM’s Marketscope 2.0 charts)

One factor that could accelerate gains for the British Pound is FXCM’s Speculative Sentiment Index (SSI). The SSI reading for the GBPUSD shows nearly 4 times as many traders are currently sellers than who are buyers in the pair. SSI is a good contrarian indicator especially when traders are lined up against the direction of the trend. The GBPUSD exemplifies both a strong trend and extreme SSI reading providing the recipe for a breakout.

A break above resistance could mean sharp gains as these sellers become a future supply of buyers (in order to close out their short positions, they would need to buy it back).

Executing the Trade

Since we anticipate the British Pound may continue its broad based rally we will take a diversified approach and buy the single currency against a basket of currencies. There are several advantages to trading a currency rather than a pair with the largest benefit being diversification.

You can try trading the GBP Basket BUY position in a Mirror account. We recommend risking less than 5% on all open trades. As a result, risk less than 1-2% on this basket so you have additional capacity to take on other trades.

Good luck with your trading!

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

Follow me on Twitter at @JWagnerFXTrader.To be added to Jeremy’s e-mail distribution list, click HERE and select SUBSCRIBE then enter in your email information.

See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.

Want to keep on top of the Sterling’s move and what fundamental news is pushing it? Join DailyFX on Demand where you can receive real time analysis of your trading ideas, real time SSI, and bank research of how funds are flowing. FXCM clients receive a discount.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.