The pound’s rally to a four-month high against the dollar is proving too much for currency traders unsure whether Mark Carney will step up stimulus efforts when he takes over as Bank of England governor next month.
Sterling’s failure to extend its advance after rising above its 200-day moving average on June 13 may be a signal its winning streak is ending, according to Barclays Plc. The pound is also approaching a key Fibonacci retracement level where sell orders tend to be clustered, while the stochastic oscillator crossed a threshold that implies an imminent reversal.
“We’re at a point where sterling is a bit stretched,” Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments Ltd., which oversees about $281 billion, said in a phone interview on June 17. “It could be pretty difficult to get beyond here in the near term.”
Dickson predicted the currency may fall to about $1.53 in two weeks, from $1.5651 at 10:02 a.m. in New York, after rising from $1.5009 on May 29.
The pound rallied about 5% from an almost three-year low of $1.4832 in March as Britain’s economy avoided an unprecedented triple-dip recession and inflation accelerated. While that suggests the Bank of England may pull back from stimulus measures that would debase the currency, Carney has said central banks can do more to aid growth, prompting analysts to forecast more weakness for the pound.
Britain’s currency is 0.2% from its level on June 13, when it climbed above the 200-day moving average for the first time this year. When the pound surpassed that level in August and April 2012, it went on to gain as much as 3.9% during the following month, data compiled by Bloomberg show.
That the currency hasn’t appreciated this time means its advance may be exhausted, Barclays technical analysts including Jordan Kotick in New York wrote in a June 17 note.
“Lack of upside traction through the 200-day average near $1.5698 is helping to keep us bearish for sterling versus the dollar,” according to the analysts. A move below $1.5615 “would encourage our bearish view toward initial targets in the $1.5490 area,” they wrote.
The stochastic indicator for the pound versus the dollar was at 88 on June 17, before falling back to 57 yesterday, indicating a selloff. The signal measures the current price relative to the highest high and lowest low during a certain period to determine if a currency is overbought or oversold. When the gauge rises above 80, an oversold condition, and crosses below its moving average, traders consider it a bearish indicator.
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