GBP/USD Ready to Go Higher But Depends on How USD Trades The GBP...

GBP/USD Ready to Go Higher But Depends on How USD Trades

The GBP is poised to rally and it has little to do with fundamentals. Fundamentally, the GBP is one of the worst-off currencies of the majors. There is still no economic growth from the UK, the BoE maintains its ultra-easy monetary policy, the country has soverign debt issues, and the government leadership is facing serious political unrest. Not a pretty picture to say the least. Many traders would like to see the GBP at MUCH lower levels and if the market trades purely on fundamentals then the GBP/USD exchange rate should probably be at 1.50 or lower.

However, that is not the case because the market does not trade on fundamentals alone but rather on EXPECTATIONS of the fundamental landscape. The market knows that the BoE is dovish. That is why yesterday’s BoE rate announcement - no change in policy or rates - was literally a non-event. The market actually expects a positive GDP print from the UK for the 4Q2009. And when that occurs, the market will expect that the BoE begin to tighten monetary policy by beginning to show signs of exiting its quantitative easing policy. It is these exepectations that are supporting the GBP.

So what is the deal with the USD? Since the start of the financial crisis in 2008, the USD has been trading as a safe-haven currency. When risk appetite increased, the USD would weaken and, conversely, when risk aversion increased, the USD strengthened. However, the USD began to buck this trend when non-farm payrolls (NFP) began to show a slow down in job losses AND the economy supported the data with strong numbers from manufacturing, housing, and the consumer. I would say since October, the USD has returned to trading on fundamentals (though I made this call back in August). But we had an interesting thing happen yesterday after the release of Australian retail sales which came in much-stronger-than-expected. The GBP/USD spiked higher as risk appetite increased sending the USD lower versus the riskier GBP. The FOMC minutes squelched the markets’ expectations of a rate hike this year. If rates remain steady at near 0%, that makes the USD an attractive funding currency again. And if that is so, then the USD could resume as a risk trade again. We got a hint of this with cable’s reaction to positive Australian news. I believe NFP could be that catalyst where a positive number could increase risk appetite and cause the USD to weaken.

Based on this premise, a good NFP number could cause the GBP to rally instead of the USD.

Technically, looking at the above daily chart, cable’s inability to break below 1.5900 spells trouble for the bears. Even during yesterday’s session when the pair did break below that whole number, it was unable to hold below there much less challenge the ST lows at 1.5864 and 1.5830. In addition, price found its way back into the hesitation zone and has just now, as of this writing, rallied all the way back to 1.6000.

NFP will be released in a few hours. Be alert. And as always, trade what you see, not what I think.