British Pound Susceptible to Short-Covering Rallies– GBP USD June 27, 2011 |
The GBP USD posted a minor closing price reversal bottom on the daily chart on Monday. Although this was not the robust pattern typically associated with a major bottom, it could be a sign that weaker shorts are beginning to cover their positions.
The key to a reversal bottom is the follow-through. In order to confirm Monday’s reversal bottom at 1.5913, the market must first trader through the day’s high at 1.6011. If this doesn’t happen then the British Pound may trade in a range or make another attempt to drive the market to new move lows.
What makes this market attractive at current levels is that the possible bottoming action is occurring inside of a major retracement zone created by the December 2010 bottom at 1.5346 and the April top at 1.6746. This retracement zone is 1.6045 to 1.5880.
In addition to the retracement zone, several bottoms at 1.5962, 1.6030, 1.5977 and 1.5936 could be looked at as support levels.
The first sign of strength will be regaining and closing over the 50% level at 1.6045. Based on the current short-term swing, counter-trend traders should only be looking for a retracement of the last swing down from 1.6262 to 1.5913 to the retracement zone at 1.6088 to 1.6129.
The main trend on the daily chart will not turn up until the swing top at 1.6262 is taken out. This is not likely to happen given the state of the U.K. economy unless news out of Greece is positive and traders trash the U.S. Dollar.
With the fundamentals still supporting weakness because of the slowing U.K. economy and speculation the Bank of England will not be raising interest rates soon, the rally in the GBP USD on Monday should be attributed to the sell-off in the U.S. Dollar as traders shed the Greenback, seeking more risk.
News that U.K. house prices fell for a second month in June reaffirmed the weakening recovery, leading to early session weakness for the British Pound against most major currencies. The disappointing news pushed the GBP USD lower to levels not seen since January and indicated that the dominant trend is still down with no real end in sight according to the daily trend indicator chart. Oversold conditions and the fact that the British Pound is trading at a long-term value zone are two reasons why Monday’s break failed to flush out weak longs.
Another sign that market sentiment remains bearish was contained in this week’s Commitment of Traders Report which showed large trader net shorts increased the past week. This is a size that hedge funds and large speculators are building big short positions for an even further decline.
Traders should continue to look for weakness in the GBP USD as long as the downtrending swing chart pattern holds up on the daily chart. Although oversold conditions make the British Pound susceptible to short-covering rallies especially if Greece passes its austerity measures and the Dollar tanks, the overall U.K. economic weakness is likely to continue to attract sellers.
About the author: Forex Mansion Analyst - James Hyerczyk
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