As I previously suspected 1.57 came under threat, not just once but for the second time in January after a relentless rally that followed the false break of range support at 1.5270. All this volatility messed up what looked like a bearish flag in the making but my view is still that cable is at risk of a significant fall as a bearish RSI divergence can be seen on the charts.
The fundamentals are also negatively aligned for the pound with less than impressive data and talk of more QE (money printing). In fact this seems like a prime opportunity for establishing shorts as great falls often follow these furious rallies. Of course it would be better to see more evidence of a top forming and I would be careful with selling until February gets underway for a number of reasons. The first day of the month (or the last one) can be very volatile on position adjustments, the EUR, gold and CHF just made new highs for the week (month and year) in late US trading on Friday, and that could continue at least a few more days. However, yen crosses, stocks and commodity currencies started to fall back a bit, and that along with the EUR’s apparent struggle to get this high could be hints of a turn in market sentiment favouring the USD despite Mr Bernanke’s newest attempts at sinking the greenback.
The idea of more dollars thrown from helicopters gave precious metals further legs for their January rally that was formed on the back of the ECB’s covert QE (providing banks with cheap money to buy up government debt). The Swissie also seems to be back in fashion despite pledges from the SNB to protect the EUR/CHF floor at 1.2000. I really wonder how effective their intervention could be in case of a sudden shock in the Eurozone…
While gold is now nearing the important 1,750 area where a failure could augur in another drop back to the 200 day moving average (currently more or less flatlining at 1,624) we could still see higher levels (1,800-ish) and a medium term top sometime in February.
In cable, the 1.5770 level has been tested 3 times and held, which is the next resistance after 10 days of continuous gains. On a break of the rising trendline the first meaningful support is 1.567. A daily close below that could open the way to a retest of the range bottom at 1.5250 where the widening daily Bollinger band is now situated.
Disclaimer: The opinions expressed in this article are the personal views of the author and do not constitute investment advice. Trading the markets is extremely risky and you can lose all the money you have, even the money you don’t have! If you don’t think you could handle that but still want to trade, your only option is to learn to do it very well…
