Pound surrenders to U.S. dollar as rally seen waning: market reversal

Analysts seeing downside for U.K. currency

The fastest-growing economy in three years may not be enough to sustain the British pound’s biggest rally since 2010, trading patterns suggest, as it struggles to break above an area of resistance for the third time in two months.

The U.K. currency strengthened to $1.6260 on Oct. 1, the highest level since January, before climbing to within 0.2% of that level on Oct. 23 and Nov. 25, suggesting an imminent decline. The pound may fall after its appreciation to the highest level in a month on Nov. 25 and subsequent close below the previous day’s low, known as a bearish engulfing candlestick pattern.

“There’s an early warning that something bigger might materialize in the pound,” Dag Muller, a technical analyst at SEB AB in Stockholm, said in a phone interview yesterday. “We’re advising to keep a downside focus. There’s no doubt this is a bearish engulfing candle, or key-day reversal, and there’s also a potential triple top.”

U.K. economic growth accelerated at its fastest pace in more than three years in the third quarter, a report from the Office for National Statistics showed today, confirming the previous estimate on Oct. 25. Gross domestic product rose 0.8% in the three months through September, up from 0.7% growth from April to June and the most since the second quarter of 2010.

Best performer

Signs of recovery in the economy have helped the pound be the best performer in the past six months among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes, strengthening 7.2%. It has appreciated 7.9% versus the dollar in that period, the strongest performance against the U.S. currency among 16 major peers.

Sterling climbed to $1.6260 on Oct. 1, the highest level since Jan. 2 and up 9.8% from this year’s low of $1.4814 on July 9. That’s the biggest gain since the period from May to August 2010, according to data compiled by Bloomberg.

The U.K. currency needs to break and close below this month’s low for a triple-top formation to be confirmed, opening up a potential decline of at least 2% from that level, according to Commerzbank AG.

The pound traded at $1.6311 as of 9:19 a.m. in New York after touching $1.6331, the highest level since Jan. 2, data compiled by Bloomberg show. The 200-day moving average was $1.5529. The U.K. currency fell to $1.5855 on Nov. 12, the weakest since Sept. 13.

‘Complete pattern’

“A daily close below the current November low will complete the pattern to offer a minimum downside measurement to $1.5535,” technical strategists at Commerzbank including Karen Jones in London, wrote in an e-mailed note yesterday. “The 200- day moving average can also be seen in this vicinity.”

Commerzbank targets a move to $1.50 within three months, according to the note.That would be the lowest since July.

Daily stochastics show the pound is overbought versus the dollar and may be about to decline.

Stochastics measure the velocity of a security’s price movement to identify overbought and oversold conditions. An indicator known as the k-line measures the current price relative to highs and lows over a certain period. Some analysts consider it a sell signal when the k-line crosses below its own moving average, or d-line, in the overbought area.

Investors should sell the pound at $1.6178, targeting a move to $1.5855 to $1.59, Citigroup Inc., the world’s second- biggest foreign exchange trader, said in a note yesterday. The U.S. bank said today that investors should exit the position should the U.K. currency rise to $1.6330, above an initial recommendation of $1.6275.

“You have a bearish daily reversal around the top of the range and momentum that’s looking rather stretched,” Shyam Devani, a technical strategist at Citigroup in London, said in a phone interview yesterday. “The price action for the pound has been bearish and we are generally of the bias that the dollar does well.”

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