Is GBP About To Get Whacked Again
By Nic Lenoir of ICAP
Maybe it is related to the recent situation with Dubai's debt, but in any case we have noticed a lot of economic forecasters point out a risk of sovereign default for an EM or even maybe a G10 country as the wild card for 2010. The anti-fiat currencies pro gold trade has been raging on. Because of its role as leader of the free world and excessive 2009 deficit, the US has been in the eye of the storm. Shorting the USD has also been a popular trade to express discontent towards Washington. However, it is hard to imagine a currency crisis in the US without starting with one in Japan or the UK. GBP has been relatively weak since 2007 compared to the rest of the G10.
We focus on EURGBP today to express the view in sterling. EURGBP has been consolidating and retraced earlier this year from 0.95 to 0.85 after the sharp rally in 2008. The rally resumed in June but October and November have marked a correction. However we feel the rally is about resume. We can see on the weekly chart that we are in the early stages of wave 5 which has a target of 109.49! On a daily chart we can see that the breakdown of 2009's price correction is relatively clean in terms of wave structure as well and it appears the pull-back could be over. The only risk would be potentially if the rally which started mid June is only another X-impulse before another zigzag taking us back to 0.85. Still though, the impulse is currently incomplete, and we have a target of 0.9477 on this move. As indicated on the 60-minute chart, we would wait a pull-back t0 0.8980 to buy and hopefully ride the trade to 0.9477 or more. Overall in 2008 the pair traded in panic and the price action is more reminiscent of a commodity hyperbolic bull move or an EM currency crise. With the 100-dma and 200-dma posting a bullish cross, we have a confirmation that the bigger trend is bullish. Using a stop on a clse below 0.8830, we have a good risk reward ration when buying aound 0.89080.
Good luck trading,