There’s speculation that the Bank of England will curb its growth forecast as the U.K. faces a double-dip recession, but the central bank may sound more hawkish this time around as the stickiness in price growth raises the risk for inflation. As BoE officials see the economy getting on a more sustainable path in the second-half of the year, we should see the group move away from its easing cycle, and the Monetary Policy Committee may start to lay out a tentative exit strategy as the board no longer sees a risk of undershooting the 2% target for inflation. In turn, we will stick with our bullish outlook for the GBPUSD, and the upward trending channel in the pound-dollar should continue to take shape as gets ready to shift gears.
NOTE: This submission is Part I of a five part series that will be released on a daily basis throughout the week of May 7th through May 11th, 2012.
*Unfortunately, due to copyright issues, I am unable to give direct links to any videos. However, many of the episodes mentioned can be found with a simple online search.
The TV show Seinfeld aired for the better part of nine seasons in the 1990s. In the U.S., it was one of the most popular television shows ever for NBC. I have fond memories of watching this program as a teenager when the episodes were new and then having a whole new appreciation of them when they hit syndication when I was in college. Despite the purposeless humor that many critics fault it for having, there are many life lessons that can be gleaned from this “Show about Nothing” that can also be related to trading.
The Chinese Restaurant (Season 2, Episode 11)
Risk Management
Jerry, George, and Elaine are going to see a movie, but decide to stop in to a Chinese restaurant to eat beforehand.
One thing you can be sure with foreign currency exchange market is that there is no thing you can be absolutely sure. Flux and change are the only constants, and you can always expect the unexpected happens. Or maybe not. Nobody can say.
The possible guarantees seem too subtle, and if it is a small international payment requires a large Currency exchange, or large international payments potentially risking enormous amounts of money and only a crystal ball could help individuals and firms surmount the tide and the turbulent waters of exchange rates.
The problem is that markets not only change on a daily basis, but very often an hourly basis, and while you may be lucky enough to catch your chosen currency at a good pace in time for a quick transfer, you may need to arrange and organize your foreign exchange weeks or months in advance.
This is certainly the situation where property investment is affected, with an initial payment or deposit required, followed by a final settlement in the appropriate foreign currency. Full article…
Euro at Risk as LTRO Feeds Dilution Bets, Greece Struggles with Bailout Terms
Japanese Yen Selling to Resume if Bernanke Testimony Unravels QE3 Outlook
British Pound Vulnerable vs. Dollar if US Yields Jump on Shift in Fed Posture
Comm Dollars Aiming Higher as Risk Appetite Improves on LTRO, US Growth
A week packed with fundamental event risk begins with the second 3-year ECB long-term refinancing operation (LTRO). Banks will begin to tap the facility on Tuesday and the results are set to be unveiled on Wednesday. Median forecasts call for a take-up of €470 billion this time around after a €489 billion outing in December. Taken together, this would amount to a firewall of close to €1 trillion containing the market-wide impact of a sovereign default within the Eurozone.
Mortgage approvals in the U.K. are expected to increase an annualized 57.2K following the 58.7K expansion in January, and the slowdown in private sector lending may drag on the British Pound as it dampens the outlook for growth. As the fundamental outlook remains clouded with high uncertainty, we may see the Bank of England show an increased willingness to expand monetary policy further, but it seems as though the MPC will endorse a wait-and-see approach throughout 2012 as central bank officials anticipate to see a more robust recovery this year.
The Upside
The Downside
As the economic recovery in the U.K. gradually gathers pace, rising property prices may encourage increased demands for home loans, and a positive development could spur another run at 1.6000 as it dampens expectations for additional asset purchases. However, subdued wage growth paired with the recent weakness in household confidence may drag on private sector lending, and the central bank may keep the door open to implement more quantitative easing in an effort to encourage a stronger recovery. In turn, we may see the GBPUSD trend lower over the remainder of the week, and the exchange rate may ultimately work its way back towards 1.5600 to test the range carried over from the previous month.
A look at the encompassing structure shows the sterling attempting to break back below former trendline resistance dating back to August 19th before rebounding sharply off the confluence of the 200-day moving average and the key 61.8% Fibonacci retracement taken from the February 29th decline at 1.05840. This level remains paramount for the sterling with a break below eyeing daily targets at the 50% extension at 1.5795. Critical topside resistance remains at the 2012-highs at the 1.60-figure.
Our 30min scalp chart sees the GBPUSD continuing to trade within the confines of an ascending Andrew’s pitchfork channel dating back to the March 21st with the exchange rate hovering just below the 1.59 soft resistance target at the close of New York trade. A breach above this level eyes topside targets at 1.5920, the 100% Fibonacci extension taken from the February 22nd and March 12th troughs at 1.5945, 1.5970, and the 1.60-figure. Note that a move above the bisecting channel line offers further conviction on our directional bias with such a scenario eyeing subsequent topside targets. Interim support rests at 1.5850 with a break below channel support negating our interim bias. Should the print prompt a bearish sterling reaction look for the break to confirm entry with subsequent floors seen at the 61.8% extension at 1.5815, and the 50% extension at 1.5770.
Projections for a slowdown in private sector lending casts a bearish outlook for the sterling, but an above-forecast print could pave the way for a long British Pound trade as it dampens the scope for more easing. Therefore, if mortgage approvals top 57.2K or unexpectedly expands from the previous month, we will need a green, five-minute candle following the release to establish a buy entry on two-lots of GBPUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our winnings.
On the other hand, subdued wage growth paired with the ongoing slack in the labor market may weigh on lending activity, and a dismal print could spark a selloff in the sterling as it dampens the prospects for future growth. As a result, if the report falls short of market expectations, we will carry out the same strategy for a short pound-dollar trade as the long position laid out above, just in reserve.
U.K. mortgage approvals increased an annualized 58.7K in January to mark the largest advance since June 2009, and the development may encourage the Bank of England to soften its dovish tone for monetary policy as the economic recovery gradually gathers pace. The British Pound pushed higher following the better-than-expected print, with the GBPUSD climbing back above 1.5950, but the sterling struggled to hold its ground during the North American trade as the pair ended the day at 1.5900.
Euro is finding good support in forex trading today, gaining on good news out of the eurozone, as well as a bit of uncertainty out of the United States.
Mario Draghi insists that the worst of the debt crisis is over in the eurozone. But what’s really boosting the euro is the fact that the German Ifo surprised forex traders with better a than expected confidence reading. With Germany to lead the way, many expect that the eurozone economy will strengthen, and that is helping the euro in forex trading.
Meanwhile, in the United States, interest rates are expected to remain low in order to support economic recovery. With low US rates, the euro offers a favorable yield, and is more attractive to forex traders.
