Watch out for Continued Pound and US Dollar Strength this Week
Eric Furstenberg • 6 min read
Last week was filled with turmoil and uncertainty. We saw some impressive moves in the currency market which were mainly fueled by the US presidential election, and the surprise win by the Republican candidate, Mr. Donald Trump. At one stage, the Democrat Hillary Clinton looked like she would take the victory. Markets were also expecting her to beat Trump. When it became evident that Trump was going to be the new US president, the markets reacted violently to the surprise. After a lot of whipsaw-like price action, the markets went in a direction that favored equity, US dollar, and pound strength, as well as commodity currency weakness.
The pound has been a benefactor of Trump’s victory. Former US president Barack Obama promised not to negotiate a bilateral trade deal with the UK if they decided to leave the UK. This policy will surely change under Trump’s leadership, which is one reason for the bid in Cable and other pound pairs. Besides this, Trump is likely to force the European Union to negotiate with the UK on Prime Minister Theresa May’s proposed terms. This is also clearly pound-positive. Trump’s leadership is likely to eliminate many of the risks which the Brexit poses to the UK economy. Let’s take a look at one of the most liquid currency pairs, the GBP/USD:
GBP/USD Daily Chart
The pair has gained solid traction above the 20-day exponential moving average. This tells us that the momentum is bullish, at least over the short-term. If we examine the technicals, we have to recognize that the larger trend is still bearish. The recent fundamental shifts regarding the UK economy are compelling, however, and it would be foolish to try and fade this recent bullish momentum on the GBP/USD. If we look at smaller timeframes, it is clear that the bullish market players are in control at the moment. Look at this hourly chart:
GBP/USD Hourly Chart
Notice the distance between the four exponential moving averages on this chart. This makes the bullish momentum even more visible. As long as these EMAs are aligned and sloping upwards, there is no reason to consider shorting the GBP/USD. I will be on the lookout for buying opportunities on this pair, although it might be more profitable to play the pound’s strength against other currencies which are significantly weaker than the US dollar at this stage. It is better to pair up a strong currency against a weak one. The US dollar has definitely not been one of the weakest currencies over the last couple of days. Look at this chart of the US dollar index:
US Dollar Index Daily Chart
As you can see, the price action on this chart is holding firmly above the 20-EMA which is a good sign of bullish momentum.
So, against which currencies can we buy the pound, except the US dollar? We normally discuss only major currency pairs in this space, but we’ll make an exception this week because of the great potential that lies elsewhere. Let’s firstly look at the GBP/CAD:
GBP/CAD Daily Chart
From Tuesday’s close to Friday’s close, the pound gained 3.67% against the Canadian dollar. That is 604.1 pips. Over the same period, the GBP/USD rose by only 220.6 pips, which is a 1.78% gain. That’s a huge difference! If we look at a daily chart of the USD/CAD, it is easy to see why this difference is so large:
USD/CAD Daily Chart
As you can see, the Canadian dollar has weakened significantly against the US dollar in the last three trading days.
To get back to the GBP/CAD, the pair looks like it holds much bullish potential. Let’s look an hourly chart of this pair:
GBP/CAD Hourly Chart
In blue, we have the 20-exponential moving average. As you can see, the price hasn’t touched this EMA in the last 34 candles. The black line is the 200-period moving average. These two moving averages (especially the 20-EMA) indicate to us just how strong the current bullish momentum is.
So how can we catch a few pips on this pair in the week ahead? The first thing I’d like to see is a continuation of the current bullish momentum and a break of Friday’s high. Then we can look for pullbacks to the 20-EMA on an hourly chart to fine-tune our long entries.
If you look at the daily chart of the GBP/CAD, you might notice that the bullish move seems to be far extended already. This doesn’t mean that the price will suddenly trade lower, but we need to be careful not to get caught up in a correction.
If we get another aggressive price acceleration like on Thursday and Friday, you might want to consider using a smaller timeframe to time your entries. If you waited for a pullback to the 20-EMA on an hourly chart, you would have missed these great moves completely. If you had used the 20-EMA on a 15-minute chart, you would have been able to jump on the wave on a pullback. Look at the following chart:
GBP/CAD 15-Minute Chart
The sharp decline in the oil price over the last few days has contributed to the weakness in the Canadian dollar. If the oil price continues to decline, it could boost the bullish momentum on the GBP/CAD.
This pair has risen even more than the GBP/CAD in the last three trading days, with a gain of 4.69%. Look at the following chart:
GBP/AUD Hourly Chart
This pair can be traded the same way as the GBP/CAD in the week ahead. Both the Canadian dollar and the Australian dollar are commodity currencies. They are also positively correlated, and many times they make similar price moves.
The Euro and the Japanese Yen are also two relatively weak currencies at the moment. They could also be great currencies to sell against the pound.
The British pound faces an array of important economic data releases this week, and we can subsequently expect a lot of volatility in pound pairs. Please read more about this week’s economic news at the end of the article.
The Australian dollar traded sharply lower against the US dollar in the last few days. This looks like a hot pair to sell in the week ahead, especially if we encounter some more US dollar strength. Look at the following chart:
AUD/USD Daily Chart
You might argue that the pair doesn’t really seem to be in a downtrend at the moment. Well, it has been trading pretty much sideways in the last couple of weeks, but if we look at the bigger picture on a weekly chart, it reminds us that the pair is in fact still in a downtrend. Look at the following chart:
AUD/USD Weekly Chart
The pair closed below the 20-week exponential moving average on Friday, and it looks like we might see further weakness in the week ahead.
The US dollar completely overpowered the Euro in the last couple of days. Although the Euro is still trading in a very large range, there might be a spillover of last week’s bearish momentum into the week ahead. Look at this daily chart:
EUR/USD Daily Chart
Now might not be the best time to enter short positions off of a daily chart. There might be better opportunities closer to the 20-day exponential moving average. If we are patient enough to wait for a retracement to form, we could take advantage of such a situation. Of course, there could be great opportunities on smaller timeframes as well.
This is a pair I’m really excited about. The long-term trend and the shorter-term trends are perfectly aligned. Let’s look at a weekly chart:
USD/CAD Weekly Chart
Although there’s been a sharp correction in the bull-trend recently, the bulls have recovered pretty well in the last couple of months. I really like last week’s strong close. The daily setup looks just as appealing as the weekly. Look at the following chart:
USD/CAD Daily Chart
The bulls are clearly dominating this scene. Although you might find good opportunities on smaller timeframes on Monday, I wouldn’t be interested in trading this pair on a daily chart right now. I’m confident that we’ll get some splendid buy setups when the pair retraces somewhat.
This pair just rocketed higher last week. On Monday it gapped higher and finished the week about 350 pips clear of the previous week’s close. The pair is coming up into an important resistance zone. If it manages to clear this resistance it might continue steadfastly on its bullish course. On Thursday the pair closed above the 200-day moving average for the first time in 234 trading days which is a great feat for the bulls. Look at this daily chart:
USD/JPY Daily Chart
I’ll be on the lookout for buying opportunities on this pair in the week ahead. It is important for me that we clear this red resistance zone first, however.
Important Economic News
RBA minutes – Tuesday, 15 November, 00:30 GMT
Employment change and unemployment rate – Thursday, November 17, 00:30 GMT
Core retail sales and retail sales numbers – Tuesday, 15 November, 13:30 GMT
October PPI numbers – Wednesday, 16 November, 13:30 GMT
CPI and PPI numbers – Tuesday, 15 November, 09:30 GMT
Inflation report hearings – Tuesday, 15 November, 10:00 GMT
Employment numbers (Claimant count), Average earnings, and unemployment rate – Wednesday, 16 November, 09:30 GMT
Retail sales and core retail sales numbers – Thursday, 16 November, 09:30 GMT
ECB President Mario Draghi speaks – Monday, 14 November, 15:00 GMT and Friday, 18 November 08:00 GMT
German GDP numbers – Tuesday, 15 November, 07:00 GMT
Eurozone CPI numbers Thursday, 17 November, 10:00 GMT
Core CPI numbers Friday, 18 November, 15:30 GMT
Third-quarter GDP numbers – Sunday, 13 November, 23:50 GMT
BOJ Governor Kuroda Speaks – Monday, 14 November, 01:30 GMT
Industrial production numbers – Monday, 14 November, 02:00 GMT
Have a prosperous week!