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Fundamentals Don’t Support Sterling Rally

By:
James Hyerczyk
Updated: Aug 20, 2015, 23:00 UTC

Bullish chart readings along with long-term investor buying helped buoy the GBP/USD today. On Monday, the Sterling surged against the U.S. Dollar after

Fundamentals Don’t Support Sterling Rally

Bullish chart readings along with long-term investor buying helped buoy the GBP/USD today. On Monday, the Sterling surged against the U.S. Dollar after piercing long-standing trendline resistance. The move continued on Tuesday despite a weaker-than-expected U.K. Construction PMI reading. 

Greater demand for higher risk assets also helped to boost the British Pound. Investors have been leaving the safety of the dollar on speculation of improvements in Europe and the lack of negative news regarding the U.S.“fiscal cliff”.   

Despite the shift in risk sentiment, some traders suggest that the rally may come to a screeching halt if additional reports indicate a slowdown in the economy. This week’s reports suggest that British construction activity shrank slightly in November and that confidence about the next 12 months fell to its lowest level in almost four years. If these trends continue then the economy may return to a recession during the fourth quarter, leading to a resumption of the Bank of England’s asset buyback program. 

Technically, the GBP/USD is trading inside of a retracement zone created by the 1.6309 to 1.5826 range. This area at 1.6067 to 1.6124 has the potential to become a strong resistance zone. If upside momentum continues, however, the market may rally as high as 1.6179 over the near-term. 

The Euro reached a six-week high versus the dollar amid optimism that the Euro Zone is finally making positive strides toward solving its debt crisis. The EUR/USD is still finding support from yesterday’s announcement that Greece offered to spend as much as 10 billion Euros ($13 billion) to buy back government securities. Additional support is being generated by reports that Spain expects funds for bank recapitalization as early as next week. 

Strong upside momentum has put the Euro in a position to challenge the October 17 top at 1.3139. The steep rally suggests that the market may be entering overbought territory which makes it vulnerable to a closing price reversal top later in the session. 

Despite the weaker U.S. Dollar, February Gold fell sharply on Tuesday. The strong moves in U.S. equity markets as well as the Euro have helped to drive down demand for the precious metal as an investment and a reserve currency. 

Technically gold is attracting some light buying at $1694.70, but this is likely profit-taking following its steep drop. The main trend turned down when the market crossed a recent bottom at $1707.00. Current momentum suggests a test of $1674.70 over the near-term. 

The news that China’s manufacturing sector posted better-than-expected results helped drive February crude oil through the $90.00 barrier, but this rally was short-lived. The market finished lower today after new data showed U.S. manufacturing activity contracted last month. Growing concerns that the U.S. will not be able to avoid the so-called “fiscal cliff” is another factor pressuring the market. The driving force behind the renewed selling pressure and the lack of buying is the potential of a recession during the first quarter if a compromise over increased taxes and spending cuts is not reached before December 31. Current price action suggests that $87.10 is the new near-term downside target. 

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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