British Pound Looks Vulnerable At The Highs

By: Richard_Cox

Over the last year, the British Pound has been one of the strongest active currencies in the foreign exchange market.  Most of the trends in this section of the market have been working off of the clear weakness in the US Dollar.  But when we start to look at the underlying economic fundamentals (inflation rates, broader growth figures), the recent moves start to look extreme and overdone.  So while this does not mean that we will see the Pound start to drop like a rock in the next few weeks, it is starting to look as though the upside in the currency is limited.

Central Bank Stances

In addition to the economic data, we also have to take into consideration the changing central bank stances that are seen in most of the major economies.  In most cases, central banks are still looking to maintain accommodative policies until growth rates start to pick up and real inflationary pressures start to negatively impact price stability at the consumer level.  This is because there are still plenty of examples of major economies that have yet to gain real traction after the global financial crisis of the last few years.  The clearest examples here can be seen in China and in the Eurozone, where debt problems and stalling growth rates are being seen when we compare the current numbers to longer term historical averages.  

In contrast, the US Federal Reserve has established itself as the first major central bank to show commitments to ending stimulus programs.  This is positive for the US Dollar and the ETFs that most closely track its value.  Examples here include the PowerShares DB US Dollar Index Bullish ETF (UUP).  Year-to-date, UUP has traded under some pretty significant pressure, especially when compared to its UK counterpart, the Guggenheim CurrencyShares British ETF (FXB).  But as long as consumer price inflation in the US outpaces what is seen in the UK, there is less of a reason to be long the Pound-backed ETF -- especially given the fact that the recent run up has reached extreme levels.

Chart Perspective:  Guggenheim CurrencyShares British ETF (FXB)

(chart source: OT Signals)

“Already this year, FXB has broken some significant resistance levels, and the market has now set its sites on the 1.70 upside target,” said Rick Bartlett, markets analyst at Orbex. “Whether or not this momentum can continue, however, is highly debatable given the oversold nature of the medium term chart activity.”  On a trend basis, the uptrend in FXB remains intact and this does suggest the strong potential for another upside run at 1.70.  But it will be important for traders to be watchful for downside breaks of short term support levels, as this could create early signals for a much larger bearish move to the downside.

So from a fundamental perspective, the latest bull run in FXB and the British Pound is still proceeding in full force.  But momentum is slowing and it is important to remember that there is emerging risk for new moves lower.

By Richard Cox

© 2014 Richard Cox - All Rights Reserved

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