Pounds to Dollars 29 Oct 2010

The pounds to dollars pair surged higher in yesterday’s trading session ending as a wide spread up candle which closed above all four moving averages once again and ended the forex trading session at USD1.5961, just shy of the USD1.60 psychological level.  The key to the performance for cable over the last few days has been the platform of support provided by the 40 day moving average, which throughout the recent short term re-tracement remained unbroken and, as such, gave us a strong signal that the currency pair was likely to recover following the sell off last week.  The question now is whether we will see cable pick up momentum to break above the high of mid October at USD1.6107 and following today’s advance GDP figures for the US this now seems increasingly likely as the prospect of a rollout of the FED QE2 programme seems certain, based on today’s number.  Should this be the case then we can expect to see further sustained weakness in the US dollar with both the euro and the pound benefitting, along with equities and commodities which should both continue to rise.  For this positive technical picture to be completed we now need to see the 9 day moving average turn higher and cross above the 14 day average once again, and these two short term moving averages will then provide the requisite platform for a sustained breakout beyond the current price point.

Pounds to Dollars Chart 25 Oct 2010

The British pound continues to be one of the worst performers agains the US dollar and despite the resumption of chronic US dollar weakness which we have seen over the past few weeks, cable continues to remain waterlogged and failing to take advantage of the current negative sentiment for the US dollar.  As such this poses several questions, not least of which, is whether the upwards momentum of the last two months has finally run out of steam as signalled by the doji candle of two weeks ago which temporarily breached the USD1.60, before closing below.  Last week’s unexpected Chinese interest rate decision also drove the pair lower, but the 40 day moving average provided a platform of support which has continued over the past few days.  It will indeed be interesting to see whether the normally positive correlation between cable and the euro vs dollar continues or indeed breaks down, and underlying the technical picture we could see fundamentals weigh heavily on the British Pound, particularly as the deficit cuts come into full effect and potentially drive the UK economy into a double dip recession.  Naturally weaker sterling would be welcome by the BOE to prop up the export market.

From a technical perspective we now have two key levels on the daily chart, the first of which is the 40 day moving average as outlined above, which currently sits at USD1.5678 and thereafter the 200 day average at USD1.5332.  If the 40 day average continues to hold firm then we may see a recovery and re-test of the USD1.60 region once again with the pound dollar lagging progress in the US dollar’s slide lower.  For any resumption of positive Sterling sentiment we need to see a break and hold above the 9 and 14 day moving averages.  This is a very messy pair to trade at present.