Concerns that the recession in Great Britain is worsening have alleviated over the past couple of months as service activity expanded, industrial production improved, house prices rose in August, and the trade deficit shrank in July.
BIG EVENTS
This week, the primary focus in the forex markets however remains with Wednesday’s, German constitutional court decision on whether to approve the permanent bailout fund and Thursday’s Federal Reserve extravaganza. Investors are currently running away from U.S. dollar positions as sentiment increases that the Fed might confirm a third round of bond purchases, better known as QE3.
GROWTH DIFFERENTIALS PLAY
The other side of the Atlantic is also familiar asset purchases, as the Bank of England followed with their own QE after the Fed’s first round of QE in March of 2009. With both economies performing rather dismally, Britain’s economy is rebounding and their currency might be best positioned to strengthen for the remainder of the calendar year.
If on Thursday, we see a delay in the Fed’s commitment to QE3, a violent knee-jerk dollar rally may happen against most European trading partners, especially the pound.
STERLING
The sterling/dollar (GBP/USD), seen in the daily chart below, continues its steep bullish rally above the psychological 1.60 level. Price action may continue to remain bullish and could see the current rally stall at the critical resistance 1.6175 level, which comes from the bearish (yellow) trend line that extends back to the early April 2011 high. Further upside targets include the 1.6300 level. A break below 1.5950 will negate the current uptrend.
