In the good old days, before the euro became a political football in a never ending game, with few rules and no referee with any authority, the pound dollar and euro dollar pairs could generally be relied on to move in unison together. A positive correlation based on the US dollar. Whilst this is still generally the case, in the last few days we have seen a significant pull back for the euro dollar which is now trading below the psychological 1.3000 region, whilst the move lower for Cable has been far less pronounced. So where is the British Pound heading next against the US dollar.
Starting with the currency strength indicator which has both the daily and weekly timeframes, on the weekly chart, we can see the orange line, the British Pound, moving firmly higher from an over sold region and with some way to go before reaching the over sold area at the top of the indicator. This suggests that the bullish momentum for Cable has a long way to go yet. Moving to the daily currency strength indicator, here again we can see that the GBP, having moved lower temporarily, is now climbing higher once again, and moving back to the over bought region on the indicator, and once again has a little way to go in this timeframe.
Moving to the charts themselves, the weekly chart is extremely interesting, as in the last week we have several signals confirming the current bullish sentiment for the longer term. First, the weekly trend has changed from white, congestion, to green, the initial signal of a change in sentiment from sideways price action to the start of a bullish trend. Next, we see this has been repeated on the trend on the three week chart below. In addition, this has been accompanied with buying volume for the first time, reinforcing the buying volume on the daily chart which has been in place for several days. In addition the trading indicator has also turned green and finally to confirm the sentiment, we have a conservative volume based signal giving us a great entry set up for a long position in this timeframe.
On the daily chart the trend has remained unbroken green since mid August, with the three day trend also moving to reflect this sentiment in early September. Volume in both time frames is firmly bullish and once again consistently green over the last few weeks. The minor pullback that we are currently seeing on the daily chart, is therefore just that – a minor correction in an otherwise longer term bullish trend for Cable, and indeed for the euro dollar if the traditional correlation holds true.
With the Fed now having started a further round of stimulus for the US economy, we can expect to see further US dollar weakness in due course, as the currency wars get underway once again with the Bank of Japan, the latest to join the game, as they launch their own version, QE8 – yes this is not a misprint – this is their eighth attempt at a stimulus for the Japanese economy, which has been in a slump for 20 years. As always, their efforts and money will be wasted as the Japanese yen will continue to strengthen after the ripples have subsided. Will they never learn!
By Anna Coulling
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