Pound Gets Outside Help
Today's Idea Tuesday, July 5, 2011
The Pound has found some recent strength on the backs of a weaker US Dollar and the passage of Greek austerity measures. For the market to gain further momentum, the UK must see better economic data. The only other saving grace for the Pound would have to come to an impasse in the US debt ceiling fight through the deadline. Technically, the Pound has to cross through and hold the 1.6125 level to garner further technical momentum. Otherwise, Sterling bears may come out in full force. Given the hefty currency option premiums, some traders may opt to consider trading the futures market instead, for example buying the September British Pound on a stop at 1.6150, or selling the September Pound at a stop at 1.5875.
Fundamentals
The British Pound found a bit of life during the past week, after the Greek austerity packages and loans were approved. Many traders are now wondering whether this bounce in the Sterling is temporary, or if the tide is about to turn. One of the major problems facing the Pound is the UK's economy relative to Euro based neighbors. The British government has been one of the more hawkish governments in the industrialized world in cutting budget deficits, which may be coming at the expense of economic growth. This has led many traders to cut their bets that the UK will raise interest rates as soon and as aggressively as the Euro Zone. The US is in the midst of a major debt ceiling debate, which has had a negative impact on the greenback versus other major currencies recently. The Pound, however, has benefited the least of the majors because of the dim economic outlook. It seems as though the Sterling will need a combination of strong economic data in the UK and further Dollar bearishness to sustain further rallies.
Technical Notes
Turning to the chart, we see the September British Pound contract rebounding at support near the 1.5920 area. Prices are now approaching minor technical resistance at the 1.6125 level. If prices are able to break through 1.6125, the market may find a bit of technical momentum to extend the rally. Prices are below the major moving averages at this point, but are nearing the 20-day moving average. A close above this average could be a signal that a near-term low is in place. Failure to break through resistance and the 20-day, however, could signal that prices could be set to take-out the near-term lows and could be heading toward the mid 1.50's.
Rob Kurzatkowski, Senior Commodity Analyst
