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British Pound Could See Declines

Currencies / British Pound Oct 31, 2017 - 11:57 AM GMT

By: Richard_Cox

Currencies

Market activity in the GBP/USD has shown some interesting trends over the last several quarters and now that the Bank of England has delivered on its expected rate increase it remains to be seen if these moves can still continue.  In most cases, when a central bank decides to raise their lending rates markets will experience an upward surge in the trading value of that currency.  But while we have seen some bullish activity in the British Pound, there is scope for further downside if broader financial volatility increases next week.


One of the main factors in explaining why this is the case comes from the fact that the British Pound is now more likely to be used as a currency in the carry trade that is a hallmark of the foreign exchange markets. 

In these cases, an investor will sell a low-yielding currency (like the JPY) in order to buy a higher-yielding currency (like the GBP).  This can result in strong interest rate profits in addition to the moves that are seen in the prices of the currencies themselves.

GBP Trading Levels

Carry trading strategies do not work as well whenever there are increases in market volatility and so the possibility of GBP carry trades could suffer if the next Donald Trump leadership appointment for the US Federal Reserve is not taken in stride with the broader expectations.

Currently, the GBP/USD is trading in the low 1.31s after falling from a resistance top near 1.3280.  Ultimately, new lows were plumbed nearly 200 pips lower -- and this is essentially the price differential that should make up the trading range for most of next week.  These next market moves will be critical in determining where the GBP/USD will be headed in the beginning of 2018 and so both traders and investors will need to remain cognizant of any technical analysis developments in the longer term charts.

Most of these foreign exchange outlooks can be expressed through CFD trading strategies that can be highly useful for investors that have already determined the price levels that are likely to contain an asset.  Since this currently looks to be the case for the GBP/USD currency pair, there are clear ways of mitigating risk through the use of protective stop losses placed outside of the aforementioned support and resistance levels.  We will continue to watch for a potential break of 1.3080 in order to assess whether or not further declines in the GBP will be seen against most of its commonly traded counterparts.

By Richard Cox

© 2017 Richard Cox - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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