Pound Weakness Exposed in Rally Deemed Illusory: Market Reversal

The pound’s advance to an eight-month high is seen at risk in trading patterns that suggest economic data that beat forecasts fail to reflect a fundamental shift in the U.K.’s prospects.

“There are enough warning signals to suggest that this is the time to exit long-sterling positions,” Karen Jones, a London-based technical strategist at Commerzbank AG, said in a phone interview yesterday.

While the pound has strengthened 6.6 percent in the past six months, the best performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, it’s down 28 percent from 2007. Europe’s third-biggest economy will only grow 1.3 percent this year and 2 percent in 2014, compared with 1.6 percent and 2.65 percent for the U.S., according to Bloomberg surveys of economists.

Britain’s currency rose today to within 0.3 percent of $1.6035, the 78.6 percent Fibonacci retracement of its decline to this year’s low in July from January’s high point, according to Commerzbank. The pound fell to $1.4814 on July 9, from a high of $1.6381 on Jan. 2, data compiled by Bloomberg show. Another measure of trading patterns, stochastic oscillators, also signal the pound has risen too fast and may be overdue for a decline.

U.K. Stimulus

“We’re still in a long-term downtrend,” Jones said. “Assuming that we see failure around here, the entire move up from July is a correction only,” she said.

Sterling rose to as high as $1.5980 today, the strongest level since Jan. 18, and was at $1.5904 at 11:37 a.m. in New York.

Britain’s currency surged after minutes of the Bank of England’s last meeting showed that officials voted unanimously to keep policy unchanged amid an improving economic outlook. In a switch from August, when some Monetary Policy Committee members saw a “compelling” case for a loosening of policy, the minutes of the Sept. 3-4 meeting today showed that “no member judged that further stimulus was appropriate at present.”

BOE Governor Mark Carney said in August that policy makers plan to hold the benchmark interest rate at a record-low 0.5 percent until unemployment falls to a pre-set threshold of 7 percent. Lower borrowing costs tend to lead to a weaker currency.

Unemployment in Britain fell to 7.7 percent in the three months through July, an official report showed Sept. 11, compared with a median economist estimate of 7.8 percent, while Citigroup Inc.’s U.K. Economic Surprise Index last month touched the highest level since November 2012.

Resistance Point

A former trend line connecting the pound’s 2008 trough of $1.3503 with its 2010 and 2012 lows is a resistance to further gains, Jones said. The currency is likely to retest this year’s low and may fall as far as the 2010 low, she said. That means the currency would tumble to $1.4231, data compiled by Bloomberg show.

Fibonacci analysis, based on the work of 13th century mathematician Leonardo of Pisa, is based on the theory that prices rise or fall by certain amounts after reaching a high or low. Resistance refers to an area on a chart where sell orders may be gathered, and support where there may be buy orders.

U.K. services expanded the most since 2006 in August, a Purchasing Managers Index showed on Sept. 4. Citigroup’s Surprise Index for the country rose to 113.3 on Aug. 19, from minus 33 in May, and was at 72.7 yesterday. A positive reading suggests economic releases have been generally better than economists’ estimates in Bloomberg surveys.

‘Surprise Factor’

“Data out of the U.K. has been mostly on the strong side, and soon enough it’s fair to assume that the surprise factor will go away,” Dag Muller, a technical strategist at SEB AB in Stockholm, said in a Sept. 17 phone interview. “The market will revise up expectations and surprises will be less positive, which poses a risk.”

The “k-line” of the pound’s stochastics measure, which measures current price relative to highs and lows, fell below the currency’s five-day moving average, known as the “d-line” on Sept. 16, data compiled by Bloomberg show.

That signals the pound has risen too far, too fast against the dollar and could be set to reverse. The pound’s relative strength index climbed to 84.8 percent today, above the 70 threshold that signals a reversal.

“The pound has risen quite fast,” said SEB’s Muller. “We’re calling for a couple of big figures lower from here.”