Of all the currency pairs to consider right now, perhaps it is the GBP/USD which will be the most interesting and certainly the most volatile over the next three days, given that it will be subject to the twin forces of the FOMC on one side and the Scottish referendum on the other. The battle lines have been drawn up, with the mighty US dollar on one side, and the Scots on the other. Indeed one could almost say this is a unique event. Under normal circumstances, the move in any currency pair is driven by the counterbalance of strength or weakness, which then tips the scales one way or another. Similar in many ways to a simple see-saw. As one side falls the other rises and vice versa with the fulcrum at the mid-point. For the British pound, the fulcrum shifted in the last two weeks, with strength in the US dollar, combining with the threat of a yes vote in the forthcoming referendum, combining to load sentiment heavily against sterling. This was the effect we saw a week ago with the gapped down open, a gap which has yet to be filled. Today of course sees the start of the two day FED meeting, and with the markets expecting a more hawkish tone, the US dollar is likely to strengthen further, following is resurgence since mid summer. Whilst interest rates are unlikely to rise soon, but not until 2015, markets are now factoring in this prospect, with the dollar index currently testing the 84.50 region on the daily chart. increasingly the index now looks set for a breakout to the upside, and with the current strong platform of support now in place, any move beyond the 85.00 area is likely to see the 88.80 region of 2010 tested in the longer term.
On the other side we then have the pound itself, and by early Friday morning, the result will be known. A yes vote is likely to send the pair plummeting, and with the two forces combing, this could trigger a price waterfall. A no vote on the other hand would be well received for cable, offsetting likely US dollar strength, and taking the pair higher on a wave of relief. With the vote in the UK still balanced on a knife edge, although perhaps marginally in favor of no vote, the prospects for cable over the next few days are interesting to say the least. By Friday it will all be over, and all we can say with any degree of certainty, is that the pair will be immensely volatile over the next few days, offering plenty of intraday trading opportunities.
Moving to the GBP/USD chart itself, and the December futures contract, yesterday’s price action was muted, with the pair closing lower with narrow spread down candle on low volume, suggesting two things. First, that the heavy selling pressure of early September has dwindled, and second, that the big operators are now watching and waiting and preparing to position themselves both for Wednesday, and perhaps more importantly for Friday. What is also interesting in terms of volumes is the COT data for last week, which revealed a shift in the net longs for Cable from 9,400 to over 26,000 – revealing to say the least. However, as always we must remember these numbers are lagged and based on the previous Tuesday’s total.
From a technical perspective, it is the potential support platform in the 1.6020 area that perhaps holds the key, and was indeed the area that provided the springboard for Wednesday’s recovery coupled with very high volumes. following the gap down of Monday. This level may well be tested again in the next 2 days, before Friday’s vote is delivered. Ultimately, what will be fascinating to witness is which of these two leviathans will triumph for Cable – will it be the US dollar or will it be the Scots. If the Scots vote yes, and the FOMC delivers as expected, then the skids really will be under the pair. A no vote on the other hand will see a titanic struggle at this level, and may just provide sufficient impetus for the pound to bounce back, in the short-term. However, there is one thing you can be certain of – as battle commences and the price action unfolds, it will be volume that reveals all, and in such a volatile week, expect to see some interesting volume profiles develop as the big operators prepare to move the GBP/USD once the dust has settled.
By Anna Coulling