World Currency Watch: FOREX Market, FOREX Trading BLOG

Sorry Goldman, Not Yet Sorry Goldman, Not Yet

Why the Pound Won’t Rally Anytime Soon

This morning the news was buzzing with Goldman Sachs’s latest take on the British pound.

The esteemed Goldman analysts predicted this month that sterling will appreciate 9% versus the euro to 84 pence by year-end, and by 14% to $1.85.

Here’s our experts take on it….

Sean Hyman: Right now I say Goldman is just jumping the gun. Economists are now speculating that the Bank of England (BOE) may have to crank back up the bond asset purchase program due to their horrible GDP numbers last week.

The technical uptrend in EUR/GBP is still intact. So the euro is still rising versus the pound. The major moving averages are also crossing each other. From a technical perspective, that’s a bullish candle pattern, and tells me the euro will rise versus the pound still.

Now I will say this: The UK actually has inflation and the Eurozone doesn’t really. So once the Brits feel the coast is clear, they may start and accelerate rate hikes quicker than the rest of the Eurozone. If that happens in the future, Goldman may get its wish.

I just think that still could be quite a ways off. That’s just my two cents.

Ashish Advani: I’d have to agree on a macro level. The BOE is still doing quantitative easing, which means we won’t see a rally soon. Watch for the pound to fall further.

I’ll be back here soon with more notes from the talented FX insiders on our currency team. Till then…

Good Currency Investing,
Kat Von Rohr, Managing Editor
World Currency Watch

Lip Service Moves Markets

This past Tuesday, I was listening to a speech from one of the Bank of England’s Deputy Governor’s, Charles Bean.

During his speech, he announced, “asset prices and improved confidence may be signs that the central bank’s bond purchases are working.”

Okay, no biggie there. I expect central bankers to toot their own horn a bit whenever something appears to be working for them.

But then he made a comment that radically moved the British pound. He announced, “It seems that activity here and elsewhere has probably troughed, so some of the worst downside risks look unlikely to crystallize.”

In other words, “quantitative easing should be tapering off soon. Watch for a recovery, because the world is improving.”

Now whether I believe him or not doesn’t really matter. It’s what the market believes that matters. So I watched the charts to see how the market responded to what he said.

After all, how traders perceive what he says is MUCH more important than what he’s actually saying.

This is just one example of how a central banker can move the currency market with their lip service. So if you’re trading a specific currency pair (in this case any pair with the British pound), you always want to be mindful of major central bank speeches or other news that could move and shift your currency pair.

To illustrate this idea, let’s take a look at how this one speech affected the British pound earlier this week…

How Bean Just Moved the Pound

Here’s what happened…

The GBP/JPY pair started moving up as he was speaking. (This means the British pound rose in value versus the Japanese yen.) I kept glancing back at the charts here and there, while I continued listening to the speech.

He went on, “At some stage, as the recovery proceeds, the Monetary Policy Committee will need to gradually remove the large monetary stimulus that we have imparted into the economy, otherwise we will be in danger of overshooting our 2% inflation target.”

(Note: inflation as noted by year-over-year CPI stands at 1.1% right now).

Oh the market really loved that statement. It bid up the GBP/JPY pair even higher!

The U.K. is One of Three Nations that
Has to Watch Inflation Right Now!

Keep in mind that the U.K. is one of three nations that even has inflation out of the G-8 major countries. All others are still in a period of deflation. So this is something they seriously have to monitor.

So as I was watching this speech unfold, I was also watching the hourly chart of GBP/JPY at the same time.

As the speech came to a close, I couldn’t help but notice it appeared that GBP/JPY was forming a bullish pattern called an “inverse head and shoulders pattern.” The “head and shoulders pattern” got its name because the trend line actually rises and fall three times, and therefore looks like a human head and two shoulders.

In this case, we’re looking at an “inverse” head and shoulders pattern, so the head and shoulders appear upside down on the chart.

The speech gave this currency pair the momentum to run up to a critical point in the pattern that validates the pattern, called it’s “neck line.” (Again, think a head and two shoulders and you’ll understand what a “neck line” refers to.)

Check it out on the chart below.

BOE’s Bean Carves Out a Bullish Pattern on the Charts!

As I left work that day, I noticed this pair closed a candle over the neck line. Then several candles held above this black neck line.

Now, if the pullbacks still hold above the neck line, this technical chart pattern projected a minimum price target of 146.00 for the currency pair.

Note: You can make price projections on this pattern by drawing a vertical line from the bottom of the head straight up to the neck line. Then take that same measurement and project it out from where it breaks above the neck line. That will give you a MINIMUM price target. It can do more but rarely does less than the target.

It doesn’t usually go straight up and hit the target. This can take days or even a week or so to happen but the point is that it gives you the confidence to hold the trade until the target is met.

Now, in this case, the price target also happens to coincide with a major downtrend line as well. So, in this case it may very well be the ultimate target should the main downtrend resume afterwards.

The great thing about a head and shoulders pattern is that if for any reason the neck line doesn’t hold and the pair drops back well below it, then you have another prime shorting opportunity too.

So either way, with this pattern, you have a “line in the sand” to help you in your trading and to give you a bullish or bearish bias just by the how the pair deals with the neck line on the chart.

Why It’s Good to Know BOTH Fundamentals & Technicals!

Here’s what I find amazing. Central bank speeches and fundamental data releases seem to coincide with chart patterns and stimulate their completions.

This is why I say that fundamentals and technicals are not opposed to each other. They actually compliment each other. It’s actually the fundamental forces that form the trends on the charts. In other words, it’s the “real” reasons why the trends form.

However, the recognition of chart patterns can prepare you for these trade set ups AHEAD OF TIME, which is key in trading. Then technicals can give you points on the chart at which you’d want to enter.

Fundamentals have a hard time doing that part.

Indeed you don’t have to choose to be JUST a fundamental trader or JUST a technical trader. You can actually be BOTH and it really pays to know something about both.

Have a nice weekend!
Sean Hyman, Professor FX

EDITOR’S NOTE: If you’re one of our Chart of the Day subscribers, then you already know about this technical set-up for the British pound. Sean released this story to Chart of the Day followers this past Wednesday. He introduces all traders to key technical charting set-ups like this five days a week. Now, you can follow some of his best moves absolutely FREE. Click here for details.

You Can’t Pay Me Enough to Trade This Cross…

In currencies, you can buy a pair just as easily as you can short a pair. …and usually I’ll have an opinion on which way I’d rather trade a pair.

I’ll buy if I’m bullish on a particular currency pair, and think it’s heading higher OR I’ll short it if I believe the pair is heading lower. That’s why I’m open to buying or shorting most Forex pairs either way.

But just because I look at all the 60 tradable pairs worldwide for opportunities, does NOT mean that I’m willing to trade all of them.

You can’t find a better example of that than the GBP/CHF (pound/Swiss franc). As far as I’m concerned, it’s the absolute worst currency cross in the market. It’s one of the few currency crosses that’s not worth either buying or selling right now…

Two Weak Currencies, One Horrible Currency Cross

What you have here is a classic example of pairing a weak currency with another equally weak currency, so we have a weak/weak-trading scenario.

The Swiss National Bank has already demonstrated they’re willing to intervene periodically to keep the Swiss franc’s value low.

Meanwhile, the British pound can’t do one thing right. Check out the chart below.

The Dollar Falls and the Pound Falls Even Harder!

Why the Dollar Can Fall & So Can the Pound!

Right now, the British pound is one of the few financial instruments in the world falling at an even faster rate than the dollar.

That’s why the GBP/USD pair is dropping on the chart even in spite of a falling buck that has been pushing up nearly every other currency.

In other words, you can’t find a much weaker currency than the British pound. Usually, I’d be willing to short the pound in a currency cross at times like these, but there’s an extra dilemma at work here.

As I mentioned, the Swiss National Bank has already been intervening in the currency market earlier this year to artificially manipulate the Swiss franc’s value. They’ve been selling francs and buying up euros mainly, but also some dollars and some pounds to push down the franc’s value, according to the central bank website.

So what happens if the Swiss National Bank wants to weaken the Swiss franc again and decide to buy even more pounds (GBP) this time? It would boost up the GBP/CHF pair.

That’s my problem with shorting the pair right now. You run the risk of central bank intervention and being on the wrong side of that intervention. Check out the GBP/CHF chart below.

If the Swiss National Bank Intervenes, You’ll Don’t Want to Hold the GBP/CHF

When in Doubt…Pass it Up, and Move on to Another Pair!

You never want to trade weak/weak scenarios like this, or strong/strong scenarios for that matter. They’ll range-trade indefinitely and won’t earn a pip in profits.

But in this case, there’s an extra fundamental risk in shorting this pair. Even though the GBP/CHF is in a downtrend, the lower it goes…the more likely the Swiss National Bank is to intervene and take the pair higher.

Yet I still don’t want to buy it either because I’d be buying a fundamentally weak currency when I could buy something stronger out there. In fact, almost any other choice would be a stronger buy candidate than the pound right now!

Therein lies the “catch 22” in owning the GBP/CHF currency cross pair right now. That’s why I wouldn’t touch it with a 10-foot pole.

Instead, I’d rather be long EUR/CHF on huge dips down because at least that way I might have the central bank on my side…and euro has been much stronger than pound…we only have to look so far as the EUR/GBP pair to see that.

Happy Trading,
Sean Hyman, aka Professor FX

EDITOR’S NOTE: This is the type of in-depth analysis Sean gives on every single currency cross (non-dollar) currency pair in his service, Currency Cross Trader. Every week, he emails his subscribers timely alerts to recommend which currency pairs to buy, sell and hold for maximum profits in the Forex market. For now, this service is only available to our FX Elite members. But I’ll keep you posted here in FX University if it becomes available again.

Attention Short Sellers

Not many people outside the industry know this, but I moderate a huge online forum for Forex traders. Every day, traders write in their thoughts on what’s happening with the currency markets around the world.

So I have my finger to the pulse of what traders are thinking not just here in the U.S., but in Europe and Asia as well.

Recently, they all seem to be watching the same pair – the GBP/USD. In the past two weeks, more traders are posting their thoughts on the GBP/USD forum than even the EUR/USD forum.

In other words, the pound is more popular than the euro. That almost NEVER happens.

It’s pretty easy to see why. As I’ve mentioned in my last two articles, the pound is poised for a major 1000-pip drop. Right now, traders are lining up to watch the show. In fact, jaws have been dropping as the pound has been falling EVEN FASTER than the dollar (7.4% on an unleveraged basis…that’s a 740% move with 100:1 leverage).

However, let me tell you…there are even better plays out there than GBP/USD – plays that could earn you 50% to 100% more in the Forex market. Even better, you won’t be late to the party…

Three Even Better Ways to Short the Pound

Below I’m going to show you three currency cross pairs.

Two of the pairs have already had a 50% larger gain than GBP/USD and one of the pairs has moved TWICE as higher (% wise) than GBP/USD has.

I bet I have your attention now. So let’s look at them.

The first currency cross has actually bolted much higher as the pound has fallen on its face. That currency pair is EUR/GBP. Check it out below.

Who Said the Euro & Pound Have to Trade Together?

Click to enlarge

It’s been amazing. The dollar has plummeted, so you’d think that EUR/USD and GBP/USD would both be rising.

However, traders didn’t account for the fact that it is possible for a currency to fall even faster than the dollar. If a currency managed that, it would actually LOSE GROUND to a falling dollar.

So since EUR/USD has been upward on its chart and GBP/USD has been downward on its chart, it’s caused the EUR/GBP pair to ROCKET higher.

So while GBP/USD has fallen just over 7%, EUR/GBP has rocketed up 10.8% on the very same pound weakness! Keep in mind that these gains are on an unleveraged basis. So the “real” return to the traders account is magnified many times over.

It wasn’t just the euro either. The pound fell just as hard versus the franc too.

Let’s take a look at the chart of GBP/CHF below. It’s also risen in excess of 10% while GBP/USD rose just over 7% in the same time period.

The Pound Fell Even Farther Vs. the Franc than the Buck

Lately, the Swiss franc has been very strong. In fact, it’s been much stronger than the dollar. Just glance at the USD/CHF chart and compare the two.

So it’s no wonder that a stronger franc would do even better against a falling pound than the weaker dollar. This is why GBP/CHF has returned 50% more than GBP/USD as the pound has been sinking.

Okay, if you think that’s something….here’s the finale! It’s GBP/JPY.

While GBP/USD returned just over 7% to short-sellers, anyone shorting the GBP/JPY walked away with double the returns. This pair just gained over 14% on the pair as it fell. Check it out on the chart below.

The Yen Has Been Torturing the Pound…

How in the world did this happen? It’s easily explainable if you compare the USD/JPY and GBP/USD charts. Obviously the buck is weaker and the yen has been stronger.

So it’s no wonder that the “stronger opponent” to the weak pound was the yen. Therefore, the short sellers of GBP/JPY made TWICE the returns by shorting this currency cross as those that just focus on the “major” pair of the GBP/USD.

Turbo-Charge your Returns by turning to the Currency Crosses!

This is the reason why I say it pays to focus on the currency crosses. Every one of these currency crosses had significant gains over the major GBP pair (GBP/USD).

Therefore, don’t rip yourself off by just looking to the majors. Some currency crosses can be even more profitable…

Happy Trading,
Sean Hyman, aka Professor FX

P.S. Attention Forex traders: This February, I’ll be in Arizona for our next FX University. And I’ll be hosting at least one workshop on the fastest way to diversify your trading account into these non-dollar pairs. You can learn more about this dynamite event here.

The ECB's and BOE's rate decisions puts more wind to the back of EUR/GBP!

The Eurozone and the U.K. economies continue to diverge.

For years and years, these two economies followed each other up and down in "lock step". Then the credit/sub-prime crisis hit. This pushed the U.K. economy lower as they experienced the same things that America experienced: Hedge fund blow ups, banks struggling, housing prices falling, etc.

On the other hand, many other European banks didn't have as much exposure to "sub-prime" as did the "financial epicenter", the U.K.

So as these economies "de-linked" and continue to diverge, it's produced a heck of an uptrend in the EUR/GBP pair. Click on the chart to enlarge it below.

Houston, we have lift off! The divergence in these two economies is producing a tremendous trend!

This trend will likely continue since the Bank of England (BOE) cut rates today by 25 basis points while the ECB kept rates unchanged in the Eurozone.

So until the ECB actually cuts rates (which will probably come about later on this year), this trend will most likely remain intact.

Sean Hyman
Currency Director
The Sovereign Society

The British pound gets ready to meet its fate in the morning as analysts expect a rate cut!

The pound gets ready to meet its fate tomorrow as the market widely expects a rate cut. The pair is barely hanging on to its latest support level by a thread.

If this breaks, you'll see this descending triangle push lower very quickly tomorrow. A rate cut would be all it would take to send it falling. Take a look at the chart below.

The Pound prepares to be "pounded".

So if there's a rate cut, even the ailing buck may catch a break when compared to the pound. That's a huge thing and tells you how weak the pound has been when the dollar is falling against almost everything known to man yet holds its own against the pound.

The ECB is widely expected to hold rates steady tomorrow. However, Trichet's comments could be the catalyst that pushes the EUR/USD through 1.59 or heading back towards 1.50.

The IMF is urging him to cut rates in order to help out the global economy's slow down. However, I expect he'll do this in the latter half of this year sometime.

Sean Hyman
Currency Director
The Sovereign Society

The British pound deals with the "line in the sand".

The British pound deals with the "line in the sand" around 1.97ish. So far it's bounced off of it. But notice that all of the recent peaks have been lower.

So what seems to be a near term victory for the pound may not be so pretty the next time it deals with the black support level below around 1.9700.

If that level breaks, "look out below".

What could trigger the GBP/USD? If we got a strong ISM Non-Manufacturing (Services) report or if we got a strong Non-Farm Payroll report. Improvements in either of these two reports could be enough to do it.

The ADP employment report improved today. So there's a chance for an improvement in the NFP report on Friday. While I think that employment is headed lower overall in the coming months, sometimes employment data does "tick up" on its way overall downward (just as downtrends on charts do).

So keep an eye out for this over the next couple of days. There's not hardly any currencies that the buck has gained ground on ...but the pound is one of those currencies. So it has a chance to push it below 1.9700 and even lower.

The pound holds for now, but will it upon the retest of 1.9700?

Sean Hyman
Currency Director
The Sovereign Society

The Ferrari of Carry Trades prepares to break out once again!

GBP/JPY (British pound vs. Japanese yen) attracts traders like stock traders used to chase after internet stocks.

This currency offers a high amount of interest paid out DAILY if you're a buyer of the pair. However, either direction that you trade the pair...it has huge swings.

Traders love these enormous swings that this currency has. Well it's just about to make another big push as it breaks out of its current range.

Get ready to hop on board once the pair closes a candle inside one of the boxes shown below. Then "hold onto your hat" and enjoy the ride. It's sure to be a volatile one. Don't trade this one if you have a weak heart. ha-ha.

Get ready to hop on the Pound Yen Train!

Sean Hyman
Currency DIrector
The Sovereign Society

The pound is poised to "take a pounding" by the dollar once again!

The Bank of England just released its minutes earlier this morning. Now there's some economists shifting gears. They think that the Bank could cut rates as soon as the April 9/10th meeting.

So the fundamentalists have a reason to short the pound against the buck now. How about the technicians/chartists out there? Yeah, they've got good reason to be short the pound as well.

There's a charting pattern known as the "head and shoulders" pattern. It's a very bearish pattern and usually means that you've put in a "top" for the moment. The left and right "humps" are the shoulders and of course the middle, higher hump, is the head.

Now when this pair breaks the uptrend line, their interest perks up. However, it's only when it breaks through what they call the "neckline" (black line below) that they enter the trade. Once a candle closes below the black line, they're on board. Check out the chart below. Click on it to enlarge it.

The dollar gets really to assault the pound once again.

It's a great thing when both fundamentalists and technicians both find a reason to take a trade.

I can see this pair targeting the 1.9600 level minimally over the upcoming days to weeks. This will be enough to break the short term uptrend line on the daily chart which, in turn, brings in the big money to short the pair as well.

So get ready for a "pounding". It's taking place right now even.

Sean Hyman
Editor/Trader
www.money-trader.com

Interest rate decisions are making this a volatile week in Currencyland!

This week Australia has been the one major economy to raise interest rates...this puts them in a class of their own right now.

The Bank of Canada surprisingly cut by 50 basis points when 25 basis points were expecgt. Boy, that new central banker there doesn't mess around. This was his first interest rate decision to make. Wow! What a way to start...

Tonight, New Zealand just kept rates on hold. However, they are the "highest rates in the land" when it comes to the major economies. So their rates are still at an "eye popping" 8.25% which is what was expected.

Then bright and early tomorrow morning we'll get the rate decisions from the U.K. and the Euro Zone. These will come out at 7am EST and 7:45am EST respectively. No changes are expected from either one...but be forewarned...the Bank of England doesn't mind surprising the market and they've had a history of it.

My guess is that they'll keep rates on hold this time...but honestly, with them...only they truly know.

Then on the 18th we'll get the interest rate decision from the U.S. Fed. Many are expecting as much as 75 basis points lopped off. Wow!

If so....when Bernanke takes it down....he takes it down. Of course, he doesn't have much of a choice. He's having to face a very difficult situation. Stagnating growth along with rising inflation (especially food and energy/commodity inflation).

One pair that I'm in right now is dodging all of those land mines...it's AUD/CAD. We already know that the Aussie has raised rates and will again sometime in the future IF inflation continues on its fast pace higher. The Bank of Canada cut more than expected and has already said they may have to cut rates further. (I like this new guy so far. So far he speaks plain English and not in "code" and tells you what he's thinking).

So therefore, over time, the rate differential will work in Australia's favor and away from Canada. It also doesn't hurt that gold is outpacing oil on its way up. Since Australia exports tons of gold and Canada exports "tons" of oil...this works in Aussie's edge over Canada as well....

But it doesn't stop there. Australia has a tighter labor market...more demand placed on it from China..wages are high...so things are good in "the land down under".

Sean Hyman
Editor/Trader
www.money-trader.com