After three months bouncing up and down in a wide range, the British pound (FXB) is finally breaking out against the U.S. dollar (UUP). This follows a very uneventful Summer Olympics where the British pound languished for the first few days and then ended the period nearly flat with the beginning of the period.
British pound breaks out after uneventful Olympics trading
The breakout is occurring over the 200-day moving average (DMA) and received strong follow-through. The pound ended last week retracing the initial boost from the Federal Reserve minutes, providing a good entry point for longs. I have left my bearish bias behind given this breakout, and I am expecting this support to hold almost no matter what happens in Jackson Hole this week. If Draghi and/or Bernanke present new programs for easing, the pound suddenly becomes even more attractive on a relative basis. If absolutely nothing new happens, then current trends should remain intact after perhaps a brief pullback.
The languishing trade during the Olympics makes sense in light of expectations that the games had very little impact on the British economy. During the press session for the Bank of Engalnd's August inflation report, Spencer Dale, Executive Director and Chief Economist at the Bank of England, observed the following in response to a question:
"We expect if anything a small positive contribution. The impact that that comes from is not through lots of tourists shopping more, it's via the impact of both the ticket sales, which although many of us bought tickets earlier in the year they actually count in terms of GDP in Q3, and also the TV rights to the Olympic Committee are also counted in Q3.
There may well be some extra spending from tourism, but as many of us know there has also been travel disruptions, more people are going on holiday, so I think those effects are small. But the contributions from both ticket sales and TV rights may lead to a very small boost to GDP in Q3."
A tremendous boost in tourism could have pushed the pound higher from the exchange of foreign currencies used to purchase goods, but apparently such activity did not happen on a scale large enough to show up in the currency action.
The action of the British pound versus the Australian dollar (FXA) has become interesting as well. After sliding for almost two months non-stop, the pound has spiked higher against the Australian dollar. The 50DMA provided no resistance, and a move above the 200DMA all but assures that the current bounce will sustain itself for quite a bit more time. If previous spikes are any guide, the GBP/AUD pair should rally at least to 1.60 before stalling.
The GBP/AUD pair tends to move in long, sustained waves of trading
Be careful out there!
Additional disclosure: In forex, I am long the British pound