British Pound Heads for Break

By Jul 29, 2009, 11:51 AM Author's Blog  

For the past four trading days, the British pound has been stuck in a 200 pip range against the U.S. dollar and a 115 pip range against the Euro. However the bottom of the range in both the GBP/USD and EUR/USD have been broken, leading currency traders to wonder if the larger range will be tested as well. For the GBP/USD, this would be a break of the 1.6750 or 1.60 level and for EUR/GBP, the levels to watch are 85 and 87 cents.

Despite the 1 percent drop in the EUR/USD today, the GBP/USD has been relatively unchanged. One month GBP/USD volatilities have fallen to the lowest level since September 2008. Such a sharp contraction in volatility usually suggests that a breakout is imminent. The only question is, in which direction. Here are some sound arguments in favor of an upside or downside breakout.

British Pound Heads for Break

Arguments for upside breakout in GBP/USD

  • Housing market continues to show signs of stabilization, house prices rise for first time in 2009
  • Break of 86 cents in EUR/GBP could lead to GBP buying
  • Ascending triangle formation
  • Moving averages are in “perfect order” which favor a new uptrend

Arguments for downside breakout in GBP/USD

  • Risk appetite is waning, which could drag all of the higher yielding currencies lower
  • U.K. Banks could be set for losses as clock ticks on GBP300bn commercial property loans
  • Q2 GDP was very weak
  • Risk of Bank of England increasing asset purchase program
  • GBP/USD breaks 4 day low

Given the arguments, we believe that the chances of a downside breakout is greater than an upside one. Based upon the following chart, a break of near term support should come soon at which point, the next level or support or resistance would be the highs and lows of the past 2 months.

British Pound Heads for Break

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