steve.jarvis's picture

Sterling update. Are the FX markets right to be concerned?

A lot has happened since I last featured Sterling (in the immediate aftermath of the UK General Election on 7th May) at which time I was broadly bullish for the Pound (see http://bit.ly/1LONbBR ).  Strength was then enjoyed for several months, but over the past couple of months the Pound has gradually lost it's sparkle against one major currency after another.  The question now, is Sterling set for a broad period of weakness or have recent losses been overdone?

Up until 6 weeks ago, Sterling was equal top with the US Dollar in my major Currency rankings, but one by one it's trend against the other major currencies has been downgraded and as we speak, only GBP/AUD & GBP/NZD remain in uptrends.  Sterling is now in a downtrend against the JPY, USD, EUR, SEK & CHF (in order of downtrend strength).

Left Chart GBP/AUD                                                                              Right Chart GBP/NZD

 

 

 

 

 

 

In helping me to determine the medium-term trend for individual Currencies I use a combination of the 22, 65 & 260 day (1, 3 & 12 month) moving averages and a MACD indicator.  The use of moving averages is well understood, but one of it's weaknesses can be that before a trend change has been confirmed, a price series has already moved well off its high or low.  This is where the MACD indicator can help, as Technical Analysts are taught to look for confirmation or divergence.  The problem is that there are different classifications of confirmation and divergence and less experienced or competent Technical Analysts, in their eagerness to be the first to call a top or bottom,  can get this wrong!   I actually take the process a step further, as once every week I analyse every major currency against every other major one (both ways), before establishing an overall ranking order.  From this I can determine subtle changes to an Currency's overall standing from one week to the next, and whether it is improving or weakening.

Which is why this week I find myself writing about Sterling.  Three weeks ago I officially downgraded it from bullish to to neutral, as it was no longer bullish against the majority of other major currencies, but had a near equal number of uptrends as downtrends.  This week it has deteriorated further, and as now only in an uptrend against 2 (as oppose to being in a downtrend against 5, and neutral against 2).  During this process, Sterling has undergone significant weakness over recent weeks and over the short-term I am actually looking for signs of a bounce to partly corrective its recent losses.  Those who follow my @interpretaSteve Twitter account may have seen me post a couple of bearish-looking charts yesterday.

As things currently stand, Sterling shows potential to continue being a broadly underperforming currency over coming weeks.  In a number of cases, such as against CAD, AUD, NZD & NOK these losses may just be to partially unwind recent sizeable gains, ahead of a return to strength towards year-end.  However, against the likes of the EUR, JPY (and USD in particular), Sterling's weakness has potential to be deeper and longer lasting.  As always, the Technical Analysis team here at TraderMade will keep a close eye on proceedings and our service subscribers (login at tradermade.com ) will be the first to know should this change. 

Left Chart GBP/USD                                                                                        Right Chart GBP/JPY

 

 

 

 

 

 

Have you taken a look at TraderMade's award-winning FX Analysis service recently?  We combine Technical and Economic Analysis for a wide range of Currency pairs, not only the most widely traded US Dollar & Cross-rates, but also Eastern Europe & Asia.  For a live sample page (the featured market is changed most days) please see http://www.tradermade.co.uk/InTA-free-sample where there are links to request your free 1 week trial (alternatively) http://www.tradermade.co.uk/user/register?regcode=landing.research.trial