Potential cable trade

It was a pure ‘risk off’ night in global markets, with bonds sought and equities under strong downside pressure. In FX land, commodity currencies were also sold, while USD/JPY pulled back to ¥108.52.

Source: Bloomberg

GBP/USD is really interesting, as sterling and the USD seems to be the standout currencies to be long into 2015 in the G10 currency region. There are strong prospects of both the Bank of England and the Federal Reserve tightening policy in the new year. This pales in comparison to all other central banks, who will stay on the sidelines. In the case of Europe and Japan, they may actually become more accommodative.

Overnight, BOE governor Mark Carney stated that, ‘with many of the conditions for the economy to normalize now met, the point at which interest rates also begin to normalize is getting closer. While there is always uncertainty about the future, you can expect interest rates to begin to increase.’

These comments had a strong effect on cable, with the price rallying around 80 pips – although there wasn’t much of a positive reaction in interest rate expectations if we look at short-sterling futures. Certainly, the comments highlight that the BoE are likely to raise rates in the coming months. A handful of economists are even calling for rates to start moving higher in November, although I am sceptical of this and would look for March as a more appropriate date.

Given GBP/USD is effectively the battle of the attractive currencies, it is really interesting to look at the technical set-up. I feel this battle can be best seen on the four-hour chart with the pair holding the 8 Monday gap (recall this was after the YouGuv Scottish referendum poll) at $1.6283. On a slightly more bearish note, we’ve seen the pair break the short-term uptrend, while the longer-term downtrend is close to being breached.

The oscillators are not giving much away either, although stochastics are moving higher off the 20 level and I am eyeing the MACD cross over. All in all, I favour longs here with a stop loss at $1.6250 (just below the September 25 low). However, my conviction is low, so my position size would be small and I would feel more enthused when the pair can close back above the former uptrend at $1.6370.  From here I feel the pair could find strong selling around the $1.6400 area, where we can see supply has hit the market of late.

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