The GBP/USD pair had a slightly bearish session on Monday, but in the end managed to bounce back and form a hammer. The last several sessions have seen either hammers or shooting stars printed, and this is a class sign of consolidative markets after a steady move like we have had.
The fact that the pair managed to hover above the 1.62 level is of interest to me as well. The top of the session on Friday failed at the 1.63 level, and this level is one that I know well. This is because the previous ascending triangle that was broken in order to start this rally measured for a move to that very level. In other words, the move has been fulfilled as of Friday.
However, the fact that we aren’t pulling back suggests that we have further to go. (There is absolutely nothing that says a move can’t “outrun” the original target.) I think this is for a number of reasons, but the fact that we have simply gone sideways in this pair instead of pulling back tells me that there is a real chance of a larger move higher before it is all said and done.
A tale of two banks
The main driver of this pair is the difference in the two banks and what they are doing. The Bank of England has basically stated that they are fairly comfortable with monetary policy at the moment, and that rates and easing won’t be needed. This is in sharp contrast with the Federal Reserve as the Fed has just announced more easing in the form of MBS purchases. This should continue to drive a wedge between the yields in both countries, and therefore make the Pound more attractive in the long run.
Certainly, there will be times when the Dollar gains ground again, but these will merely be pullbacks as ultimately the fundamentals come back into play. Because of this, I am more than happy to be long this pair in two separate ways: Long on pullbacks in this market, and long the FXB ETF in the stock market. The FXB is essentially the same as being long the British Pound, but in a low leverage kind of way. This allows me to continue to gain from the nice uptrend, but ride the volatility out much easier than when I am leveraged in the spot market. 1.60 is especially interesting to me on pullbacks, and a break of 1.63 level has me buying as well.