Talking Points:
- In August, GBPUSD broke below a long-standing support after a period of negative divergence
- Since June 18th, On Balance Real Volume has been falling towards a 5-year low
- Look for forward guidance from the Fed and BOE to feed a monetary policy bias
Use the On Balance Real Volume app as a unique addition to your trading strategy free here
The British Pound spent 9 months sliding more than 15 percent against the US Dollar through July 2014. On April 13th this year, the Cable finally bounced after reaching a near five-year low. Since then, the pair has shown certain signs of weakness despite the multi-month bullish bias in the exchange rate. In particular, the recovery for GBPUSD clashes with a negative volume divergence.
The FXCM On Balance Real Volume is a free app for Tradestation II available to both live and demo Forex trading accounts. As the indicator falls, fewer traders are taking positions to support the move. The On Balance Real Volume can serve as a function of conviction behind price movement. Forex Trading Instructor Tyler Yell has an in-depth article which explains the utility of the application.
While GBPUSD has posted a remarkable rebound against the exceptionally strong dollar, OBRV has shown a fading conviction – as can be seen in the chart below. In other words, gains were derived from a diminishing pool of bulls which raised the risk of a rebalancing. This had in turn created what is commonly referred to as ‘negative divergence’. Indeed after this pattern emerged, GBPUSD broke trendline support in its lackluster bull trend on August 25th and fell more than 4 percent since. At the same time, On Balance Real Volume has continued to decline, approaching a 5-year low. The loss in volume can signal the GBPUSD has further premium to work off.
Taking this into account, a fundamental focus on monetary policy could help traders determine better overview of the pair’s next move. The Fed’s and BoE’s monetary policy stance are remarkably similar given the frequency of dovish central banks. Recently the Fed’s Chairwomen Janet Yellen gave a speech reiterating 2015 rate-hike plans which furthered greenback strength. This past Thursday, Bank of England Monetary Policy Committee member Ian McCafferty said that it is appropriate for the process of normalization to begin. According to futures used to hedge interest rate changes, the Federal Reserve is expected to be the first to move. However, as the months wear on and the tightening efforts near, speculation will leverage this fundamental struggle and add context to the technical picture.
