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Quick Takes Video: The Appeal and the Reality of a Pound Reversal

Quick Takes Video: The Appeal and the Reality of a Pound Reversal

2017-08-30 22:43:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The British Pound has proven one of the least volatile and trend oriented of the major currencies
  • General market conditions are not conducive to wide trends or breakouts with follow through - making GBP a good fit
  • For a bullish development for Pound, I like GBP/CAD and GBP/AUD while the bearish view better suits EUR/GBP and GBP/NZD

Speculative retail traders have increased their trading on EUR/GBP as a strong trend has drawn out reversal calls while the GBP/USD's chop has chased traders away. Check the DailyFX Sentiment page to see how are traders positioned.

The British Pound is not one of the currencies that has drawn traders undivided attention as of late. It hasn't experienced the degree of volatility see in Yen crosses nor has it enjoyed the scale of trend championed by the Dollar or Euro. However, general market conditions are not particularly favorable to those characteristics. Volatility has proven time and again to be short lived across the entire financial system. That will eventually end, but exactly when is a question that remains continuously elusive and lure that continually leads market participants astray. Where we have a remarkably high profile trend in EUR/USD, the instance of trends across the broader market is far less common - particularly over the past few months. Against this backdrop, the Pound and its crosses are far more fitting to trade.

Establishing what will turn the market from inactive and range bound to explosive and driven is relatively straightforward: Brexit uncertainty and Bank of England policy moves. The last time we have seen a dedicated move from the Pound was the months following the surprise Brexit vote - from the June 24th recognition of the vote outcome to the October 7th flash crash. Since then, the moves have been measured and aligned rather nicely to the progress and pace that the future grows a little clearer for the UK's future with its single status. If the uncertainty surrounding Brexit were to disappear tomorrow, the Sterling's response would be nothing short of epic, but that is an extremely low probability. As for monetary policy, the BoE is just as concerned about the economic implications from these negotiations as most individuals; and has proven very reticent to make the remarkable change in tack moves that have come from the Fed, BoC or even ECB. With these themes acting as anchor rather than driver, the opportunities are better found in crosses with measured potential - with accounting for the second currency's fundamental motivations.

With a currency that can rise as easily as it falls, it is important to have options regardless of what transpires. For that reason, I have pairs that I like if the Pound is to find an unexpected updraft in an otherwise quiet week forward of event risk as well as bearish options that can exploit secondary factors. For bullish setups, I like GBP/AUD and GBP/CAD. Both pairs have been driven down relentlessly these past months mainly for the risk reach that has favored the higher yielding currencies. A slow pullback can turn into true reversal, but I will look for a technical break and would be most interesting if further provoked by a risk aversion. On the opposite side of the scale, GBP/NZD and EUR/GBP are better options for a weak sterling. The range on GBP/NZD is well established and this is a better option for trading should risk trends in fact hold or recover. EUR/GBP is in a very mature trend just off nine-year highs, but playing bounces after pullbacks in prevailing bull trends is a higher probability approach. We focus in on the Pound in today's Quick Takes video.

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Quick Takes Video: The Appeal and the Reality of a Pound ReversalQuick Takes Video: The Appeal and the Reality of a Pound ReversalQuick Takes Video: The Appeal and the Reality of a Pound ReversalQuick Takes Video: The Appeal and the Reality of a Pound Reversal

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