Sterling Set for Weak Gains Ahead of Holiday Shopping Season
The performance of the GBP/USD currency pair since June 23, 2016 is clearly bearish. From a high of 1.47 to a low of 1.26, a sharp depreciation has taken place. However, weakness has abated to a degree. That the pound hit a 31-year low and subsequently reversed is significant. The GBP/USD pair’s current exchange rate is now slightly above the 50-day moving average of 1.245. This reversal kicked in recently. That the 200-day moving average is sharply higher at 1.348 is testament to the strength of the GBP over the past 7 months. The dollar weakness that we are seeing is evident in the DXY. This broad measure of the USD is a weighted index comprising multiple currencies including the Swiss franc (CHF) at 3.6%, the Swedish krona (SEK) at 4.2%, the Canadian Dollar (CAD) at 9.1%, the Euro (EUR) at 57.6%, the Japanese Yen (JPY) at 13.6%, and the British pound (GBP) at 11.9%. Any strengthening in the GBP has a significant effect on the DXY.
Forex Markets Are Dominated by Seasonality
Currency trading is subject to seasonal patterns. Over the years, we have seen several trends in the currency trading arena. For example, during the month of December, the GBP/USD currency pair has typically strengthened between 1996 and 2015. The US dollar typically fares worse in December, compared to the EUR, GBP, JPY, and AUD. With regards to the GBP/USD currency pair, seasonality plays a big role. The pair typically declines in January, February, and March. It picks up in April, drops in May and rises through June and July. The GBP/USD pair weekends in August, but strengthens in September and October.
In November, the pair tends to decline, followed by slight gains in December. In terms of monthly changes over time, the GBP/USD pair gained the most in the period 2000 through 2004 and 2012 through 2013. It fared worst between 2006 and 2010. Overall though, the GBP/USD pair is rather flat in December. Over the past 20-year period, this currency pair has rallied 55% of the time and retreated 45% of the time. In terms of actual movements, the average performance indicates a +23 PIP movement per month. Over the past 20-year period, the GBP/USD pair has gained ground only 3 times in December since 2005.
How Has the GBP/USD Pair Been Performing of Late?
The GBP/USD currency pair was trading in a negative range on Tuesday, 6 December and into Wednesday, 7 December. It was approaching the support level at 1.2550, but if it manages to hold above that level, it could reverse direction and continue in its upward trajectory. The resistance level for this currency pair is at 1.2845. If the GBP/USD pair doesn’t break below the 1.2550 level and hold beneath it, a bullish trajectory is likely. It is clearly oversold on the stochastic indicators, but if it breaks beneath the key 1.2550 level, it could fall to 1.2339. Expectations of continued bullish momentum abound among currency traders for the short term. In terms of moving averages and numeric indicators, the GBP is a buy. As far as technical indicators go, the downtrend is being buffeted by a short-term mini uptrend. The currency pair has moved towards the short-term uptrend line at the 50% Fibonacci retracement level. If it hits that line, it will likely move lower than 1.25. A short-term pullback in the GBP/USD pair is a likely scenario after profit-taking.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.