Pound Eyes Chart Breakout Against Franc as BOE Shifts Momentum

  • Sterling bounces off bottom of four-month chart pattern
  • Momentum indicators, short positioning favor potential gains

BOE May Make Smaller Adjustments, Says RBC's Lignos

The pound’s rally on a more hawkish tone from the Bank of England has led to a turnaround in technical momentum indicators, which suggest it could break out from a four-month range against the Swiss franc.

The pound last week bounced off the bottom of a triangle chart pattern in place since November against the Swiss currency. The change in sentiment comes as the Bank of England’s minutes last week shifted market expectations toward tighter policy in the U.K. while traders are still short on the pound, signaling the potential for more short-covering.

The pound has found support against the franc at around 1.22, the last Fibonacci retracement line of the rally from mid-January to late February and the lower end of the four-month triangle pattern. The bounce has lifted daily slow stochastics, a momentum indicator that measures the velocity of a security’s price movement, higher from oversold levels.

Leveraged investors, as a community, are still short on the pound at more than one standard deviation below the 90-day-average readings, according to a CFTC report dated March 14. Overall speculative net positioning shows that sterling shorts outweigh longs by about 41 percent as a percentage of open interest.

  • BOE policy committee member Kristin Forbes voted for an interest-rate increase and the minutes of the central bank’s meeting last week hinted that if economic data exceeds expectations, this could push more policy makers to favor a hike
    • Money markets show increasing bets on a hike by mid-2018. The implied odds of a 25 basis-point boost by June 2018 have climbed to 73 percent, compared with 47 percent on March 15. For September 2018, markets are pricing in a 90 percent chance of the BOE raising rates by 25 basis points
  • Since March 15, sterling is up versus all of its G-10 peers
  • Upper end of the triangle pattern is at 1.2575 today, but drops circa 5 pips on a daily basis
  • Any fresh burst in momentum could however take a breather toward the 1.2639 long-term average line
  • Risk to bull case is recent sign of weakening in the U.K. economy amid Brexit uncertainty, with Prime Minister Theresa May planning to trigger Article 50 on March 29
  • Main risk level for bulls seen at 1.2215 on a closing basis
  • Resistance is at 1.2490-97 (61.8% Fibonacci of Feb. 22 to March 14 fall, 100-DMA), 1.2555 (76.4% Fibonacci of Feb. 22 to March 14 fall), 1.2639-60 (200-DMA, Feb. high), and 1.2915 (Dec. 2016 high)
  • NOTE: Sejul Gokal is an technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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