The Problem With ‘Shorting’ the Pound Against the Dollar at These Levels

The Problem With ‘Shorting’ the Pound Against the Dollar at These Levels

15 April 2016, 15:32
Vasilii Apostolidi

The pound sterling has been a reliable ‘sell’ over recent months, but we are now at stage where there is little historical context to guide traders.

There is no doubting sterling remains under pressure against the US dollar and a fall from current levels (1.40-1.41) would breach important technical levels.

Typically a breach would draw more sellers into the market in anticipation of an extension of the move lower.

“Not only would a drop through 1.4130 break out of the triangle, it would also cause the MACD to roll over. This combination of signals may give traders more confidence to enter (or stop-enter) a sell at 1.4115, with a stop loss around 1.4210,” says Micheal McCarthy at spread betting providers CMC Markets.

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Above (C) CMC Markets.

However, sterling is seen trading at levels not seen since the turn of the decade, and just below that levels not seen since 1980’s. 

This will have a big influence on trader decisions.

Trading according to technical considerations, requires time-tested levels from which to sell and buy at.

Indeed, McCarthy acknowledges that setting a target for his suggested trade is a little more problematic.

“There is little recent price history at current levels, or below. In fact, sterling has not traded here since 2010. The post GFC lows close to 1.3500 may be an eventual target, but another approach could employ a trailing stop loss set at the original 95 point spread between entry and fixed stop,” says McCarthy.

Sterling Still a ‘Conviction’ Sell

Either way, markets will likely continue with a strategy of selling into any sterling-dollar strength ahead of the June 23rd referendum on the UK’s continued membership of the European Union.

Analysts at Westpac in Sydney say selling GBP/USD strength is one of their High Conviction Trades.

“Even if the polls break toward more clearly toward "Bremain" ahead of the 23 June referendum it’s hard to see GBP forcefully unwinding its Brexit premium until the certainty of the vote is out of the way,” says Martina Song of Westpac Global Strategy Group.

Westpac are looking to sell GBP/USD at 1.4450 with a stop-loss placed at 1.4610 as protection on any unforeseen sterling strength.

According to Westpac’s modelling, the GBP remains heavily out of favour at -17.7% of their portfolio exposure.

"The bearish view is predicated more on a negative trend in gilt yields and poor external accounts," notes Song.

Also suggesting that the fall into unchartered territory offers little reason to bet in favour of the pound is analyst Lucy Lillicrap atAssociated Foreign Exchange.

“The response from historical 1.4000 support has been enough to preserve an effective range either side of 1.4250 for now but GBP prices are yet to confirm recent activity as base-forming,” says Lillicrap who manages risk on large scale currency transfers.

Instead the analyst believes what we are witnessing is a choppy consolidation that “can plausibly be labelled as preparation for another downturn and if 1.3990/00 support gives way an extension towards an extension towards and potentially through the prior 1.3825 cyclical lows would ensue.”


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