After GFC left Brits in pieces, take a sideways glance at sterling

Britain has been hard hit by the global financial crisis and its aftermath, and that reality has shown itself in the trajectory of its currency. From 2001-07 the pound was strong, as anyone who holidayed in Britain then could tell you.

Britain has been hard hit by the global financial crisis and its aftermath, and that reality has shown itself in the trajectory of its currency. From 2001-07 the pound was strong, as anyone who holidayed in Britain then could tell you.

This week's chart, produced by Alan Clement, a member of the Australian Technical Analysts Association, shows the pound gained 53 per cent in those years, climbing from a low of 137 to 210 against the index shown here. That index is made up of a basket of currencies important to British trade and investment flows, with the US dollar having the greatest influence.

Once the GFC hit, the pound crashed, diving dramatically through the steep red uptrend line, almost plumbing its 2001 lows. From the nadir of 2009, it slowly began to show signs of life, moving into an ascending triangle pattern.

Such a pattern is considered bullish, as it is formed through a series of higher lows on the chart while being constrained on the upside by a constant resistance level, in this case at 167. As the triangle tightens, pressure is said to build up as buyers come in at ever-higher levels and eventually push through the resistance level into a breakout.

However, in this case the buyers didn't win out and the upper resistance level was not breached. That resistance level is given extra significance by technical analysts as it represents a 38 per cent retracement from the 2009 low point to the pre-GFC high and so is said to require more power to break through. What actually happened earlier this year was a break to the downside, with the currency falling through the red line on the chart and forming a "failed ascending triangle" pattern. The fall was relatively brief, and now the pound is consolidating in a narrow range below the broken trend line.

This means the outlook for the pound is neutral. There is long-term support at 143 and upper resistance at 167, and until one of these levels is breached it will remain in sideways consolidation.

Markets are said to correct either through price movements or by investors absorbing a new reality over time. So Clement observes that in the case of the pound and its steep post-GFC decline, the market has chosen to spend time absorbing that move rather than correcting sharply upwards.

On the fundamental side, sterling is likely to remain weak because new Bank of England governor Mark Carney has said he would continue with low interest rates and quantitative easing while the US was looking to scale back quantitative easing as its economy improved.

Investors wanting exposure to the pound can gain it through CFDs, ETFs and the foreign exchange market.

This column is not investment advice. rodmyr@gmail.com

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