What’s up forex friends! While I let my short EUR/USD trade marinate, I decided to peruse the charts for potential long-term opportunities. Looks like I’ve got an idea on GBP/USD that I’d like to share and get your thoughts on.
Since the financial crisis over 5 years ago (man, that seems like just yesterday), GBP/USD has been in a long term ranging pattern between around 1.5000 to 1.6500. There hasn’t been any major trends in the pair since both the U.S. and U.K. were struggling with the fragile financial markets, taking unprecedented monetary policy actions, and making numerous changes to fiscal policy and financial market regulations.
Well, we’re back at the top of that 5 year range, at levels not seen since 2009 and 2011. Looking back at 2011, probably the major shift in direction occurred when the Fed ended its second quantitative easing efforts. And not too long after that, the MPC increased their asset purchasing program by an additional 75B GBP. Combined, we saw buying support for the Greenback vs. Sterling at the end of 2011 until talks of more stimulus from both central banks started to arise in 2012.
So will we see similar behavior in 2014? Is this a momentary top? Well, the Fed just recently decided to reduce their asset purchases while the MPC continues to keep interest rates steady and asset purchases as-is at 375B GBP per month. This means we’re starting to see a divergence in monetary policy, which is potentially bullish for the U.S. dollar. Of course, this isn’t as big a gap as the Fed ending their program while the MPC added in 2011, but it just may be the beginning.
Also, one other difference to take note of between then and now is that from 2011 – 2012, the U.K. was still in deep recession while the outlook of the U.S. was a bit brighter, and there was little chance for additional stimulus needed for the latter (and we all know how that played out). In contrast, 2014 is looking good for both countries as data steadily improved through the second half of 2013. If the market does start to move towards Greenbacks, it may not be as big a move as the end of 2011.