Daily December British Pound Pattern, Price & Time Analysis
The December British Pound has been trading steady to higher since bottoming on Thursday at 1.5867. Since this contract is based on theSterling’s relationship to the Greenback, this movement must be related to the fundamental forces affecting both currencies. In my opinion, the link between the two currencies is related to quantitative easing.
If you recall, in early October the Bank of England’s Monetary Policy Committee extended its 200 billion pound quantitative easing in October by announcing plans to buy 75 billion pounds of gilts over the next four months. Prior to this action, the BoE was considering raising interest rates so something must have happened to encourage them not to pursue this path. This was most likely the lingering debt situation in Europe although renewed risk of recession also played a major part in the decision process.
On the Thursday, the MPC meets again and this time is faced with the same situation. Traders have priced in virtually no chance it will raise interest rates at this time so the issue will remain additional quantitative easing. Although not able to shake the Euro Zone crisis, motions have been put in place that suggest the problems may be less of an issue than they were just a few weeks ago. With the MPC likely to take a wait and see attitude while Europe sorts out its issues, expectations are that additional quantitative easing will be kept on hold at this time. This is most likely the reason why the British Pound is trading firm at this time.
The day before the MPC meets, Fed Chairman Ben Bernanke is going to give a speech at the Federal Reserve Conference inWashington. Although he is expected to talk about the U.S.labor market and the E.U. debt crisis, traders will be listening for hints of additional quantitative easing. Based on last week’s Fed monetary policy statement, it expects the economy to remain weak highlighted by slow growth. Bernanke may mention the effects of the EU crisis on U.S. growth. This may open the door to a comment such as “an acceleration of the debt crisis in Europe could weaken the U.S.economy to a point where additional stimulus may be warranted”. This is the type of statement that is likely to move the market.
Technically, the December British Pound is in an uptrend on the daily chart. The tight range between 1.6158 to 1.5867 is forcing the market to straddle the .618 level at 1.6049. While traders await the events later in the week, continue to look for this rangebound trading. A breakout above 1.6158 is likely to trigger an acceleration to the upside. A move through the main bottom at 1.5867 will turn the main trend down and signal a shift in sentiment. This is likely to occur if BoE applies additional QE or if the Euro Zone crisis worsens.
In summary, look for the Bank of England to leave interest rates unchanged as well as the current level of quantitative easing. These factors are helping to boost the Sterling. Additional upside pressure could come from a statement from Fed Chairman Bernanke in a speech he is scheduled to give the day before. If he mentions additional stimulus then look for the Dollar to weaken. This will give the December British Pound an additional boost. All bets are off, however, if the Euro Zone debt crisis worsens to the point that triggers another flight to safety rally into the Dollar.
