Sound as a Pound?
Fundamentals
The British Pound has steadily climbed since making lows in mid-March, fueled by the stock market rally. The rise in equity prices has sparked a repatriation of funds to the UK, as investors look for investment opportunities at home, instead of parking funds in US Dollars. Forex traders have also become bullish on the Pound versus the Euro. The Eurozone faces very similar economic challenges to the UK and there has been a great deal of in-fighting between the countries that make up the union, which could delay government response to the crisis. Fundamentally, Britain has shown some signs of stabilization in the housing market and in manufacturing, whereas Continental Europe appears to be on the downswing. Yields on UK debt remain attractive when compared to similar treasuries in the US, which could bring in foreign investment. There are still plenty of challenges facing the UK banking system and, much like the US, the government has spent billions instituting rescue packages for banks. This may cause traders to be skittish and jump ship at the first signs of trouble. The month-long rally in the global equities market has been impressive and has somewhat eased investors' worst fears. However, if the rally reverses course, the Pound and other major currencies may fall out of favor, as investors once again flock to the relative safety of the Dollar.
Given a more positive analyst sentiment and bullish chart developments, traders may opt to go long the British Pound. The skittish and volatile nature of the currency markets may favor entering a bull call spread instead of trading the outright futures. Traders bullish the Pound may want to consider purchasing the May 1.51 call and selling the May 1.53 call for a debit of 80 points, or $500. The maximum profit potential is 120 points, or $750, if the June contract closes above 1.5300 on the May 8th expiration date.
Technicals
Technically, the outlook for the June British Pound has turned much more positive in recent weeks. Yesterday's close above the February 9th relative high close of 1.4896 can be viewed as a bullish development. If the market is able to establish support at this level, the next significant resistance level may be 1.5461. The 50-day and 100-day moving averages are converging, suggesting the two averages could cross over to the upside in the near-term, which would offer further confirmation to the bullish crossover of the 20-day and 50-day averages last week. The RSI indicator is nearing overbought levels, suggesting upward price movement may be subdued.
Rob Kurzatkowski, Senior Commodity Analyst
