Watch Out For an Active Pound on Tuesday!
Eric Furstenberg • 3 min read
Hello, guys! If you traded FX today, I’m sure you noticed that the US Dollar performed relatively well. The Greenback managed to gain against most of the other major currencies. Two majors were able to hold back the Dollar – the Canadian Dollar, and the British Pound.
So where does the Pound get all its strength from? Where has all the Brexit-fueled selling disappeared to? Let’s take a look at Cable:
GBP/USD – The Bulls are Still a Threat
GBP/USD Daily Chart
A British exit from the European Single Market could possibly be avoided. Perhaps it sounds far-fetched, but it is definitely something to be prepared for. As I mentioned in a previous article, British Pound Going Haywire!, the Scottish parliament is opposing the Brexit and voted against triggering Article 50 which would, in turn, trigger the Brexit negotiations. It seems like there is a secret backdoor through which the UK will escape the whole ordeal, or either manage to negotiate a ‘Soft Brexit’ which would not be so hard on the UK economy.
Another important factor which is lifting the Pound is the UK’s escalating inflation. The weak Pound has quickly started to put upward pressure on UK inflation. When a country’s inflation rises sharply, its central bank needs to take certain precautions to avoid overshooting its inflation target. One such precaution is to tighten the reigns by raising interest rates. As we know, money follows yield, and if the BOE (Bank of England) started raising their rates, money would flow into the Pound because of the greater yield it would then offer. Of course, the market tends to front-run the actual rate hikes, which has already started to happen as investors are buying the Pound in expectation of greater yields in the future.
These factors have boosted the Pound’s appeal over the last few months. When we look at the chart above, we can clearly identify a range-bound market. However, the Pound is relentlessly holding on to its 20-day exponential moving average as support. Perhaps it seems to you like the Pound didn’t perform really well today, but although it didn’t gain much against the Dollar, its strength is definitely remarkable when we consider the Dollar’s good performance today.
As mentioned earlier, we have inflation data out of the UK tomorrow at 09:30 GMT. It is called CPI (Consumer Price Index). This is what you will see in your economic calendar. The BOE’s inflation target is 2 percent. January’s Year over Year CPI number is expected to come in at 1.9 percent which is pretty close to the 2 percent target. If the actual result beats the forecasted 1.9 percent, it should be really positive for the Pound – especially if the reading is much better than expected. I suppose an on-par reading could spark a bid in the Pound as well, but let’s see what happens tomorrow.
USD/CHF – The Bulls are Gaining Momentum
USD/CHF Daily Chart
The USD/CHF recently traded down to its 200-day moving average. I often mention how important this particular moving average is in the investment world. Here you can see how the 200-MA acted as a rock solid level of resistance and deflected the price very effectively. Since the price bumped into the 200-MA a few days ago, it has also managed to close above its 20-day exponential moving average for the third consecutive day today. It will be interesting to see where this pair will go in the next few weeks. If the US Dollar gains more traction soon, this pair could continue trading higher and offer some splendid buying opportunities. I caught a few pips on this pair today with a long position. It would be great to see some bullish follow-through tomorrow.
S&P 500 – Need I Say Anything?
Talking about bullish follow-through, the S&P 500 posted another impressive bullish day today. Look at this daily chart:
S&P 500 Daily Chart
This is a really powerful bull market! I’m still in my long positions on this stock index. I like riding big moves like this for as long as possible.
See how the price is extending away from the 20-EMA here. Now might not be the perfect time to enter long positions on this index, but it's really an instrument worth watching in the weeks to come. I’m expecting more buying opportunities to present themselves soon. Pullbacks to the 20-EMA would be perfect, provided we see valid signs of rejection off of it.
By the way, don’t forget that we’re expanding our trade signal service to include commodities and stock indices. These include gold, crude oil, and the Nikkei 225. Also, our forex signals are still available for you to profit from.
That’s all for now, traders, good luck trading out there!