The British pound has been on a fascinating and very bullish ride versus the U.S. dollar. On Thursday, the pound accentuated its action by perfectly tagging the lower part of its bullish channel directly above support at the 200-day moving average (DMA). (Click for larger view)
Source: dailyfx.com charts (click for larger view)
I redrew the top of the channel to incorporate the over-extended move that now marks the pound’s recent highs. I am suggesting that the pound is no longer over-bought and should now bounce off current support, given the convergence of three strong catalysts. However, it should also top out at or below the last highs. That is, the pound is likely on the last legs of its impressive rally.
This latest change of heart was motivated by watching Bank of England governor Mervyn King negotiate the latest quarterly Inflation Report. King was as cool as ever. He was also as dour as ever on the prospects for the economy in the United Kingdom. He emphasized that the recovery in the United Kingdom will roll out over the course of years, not months, and multiple, significant risks remain along the way, particularly the repair of bank balance sheets. King also noted his common refrain that this recovery will feature a move away from domestic consumption and toward an expansion of exports. Finally, King is remains very comfortable with the BoE’s outlook for lower inflation ahead. All this speaks to a monetary policy that will be more supportive of a weaker than a stronger currency. (Read King’s introductory remarks here). Moreover, the caution and deepening dovish stance of the U.S. Federal Reserve should make caution the rule with the BoE as well.
Without the prospect of an imminent rate hike, I strongly suspect the current enthusiasm for the pound will slowly but surely wane. Whether it is a break of current support or a last gasp lunge toward recent highs, I will be shedding the bull suit soon as well. (Lydia Finkley, “faithmight”, long-time trader of the British pound, shares my opinion on the pound topping out here).
Be careful out there!
Full disclosure: long GBP/USD