The currency markets have gone through waves and cycles of themes, thanks to the constant tinkering and interventions by the world's central banks. With the big news headlines for the United Kingdom receding in importance to the U.S. and eurozone, it appears "safe," on a relative basis, to ride the wave with the British pound.
In "British Pound Breaks Out After Uneventful Summer Olympics In London," I claimed that Jackson Hole would present a win-win for the British pound. While ECB President Mario Draghi had to bail on the Jackson Hole confab to attend to more pressing matters back home (like laying out plans to buy the bonds of bankrupt governments), Ben Bernanke seemed to deliver the catalyst the pound needed to bounce off important support.
The British Pound bounces off support
The 200-day moving average (DMA) now looks like very firm support from which the pound should continue to rally against the U.S. dollar (CurrencyShares British Pound Sterling Trust ETF: FXB).
The presumed carry trade for the Australian dollar (CurrencyShares Australian Dollar Trust ETF: FXA) and against the British pound continues to unwind. GBP/AUD rallied to 1.54 before falling back slightly, but Jackson Hole did not reignite the carry trade as one might expect, given overall weakness in the U.S. dollar. The bounce from August lows remains well-intact, and the strong momentum continues to point upward.
I consider GBP/AUD a good "buy the dip" play. Whenever this currency pair finally takes a rest, I will be watching carefully how it responds to points of likely support (like the 50 and 200 DMAs).
The presumed carry trade continues to unwind in the GBP/AUD currency pair
If this strong rally off August lows does indeed represent the unwind of a carry trade, it augurs poorly for the short-term prospects of the stock market (I will present an update on the current relationship between the Australian dollar and the S&P 500 in an upcoming post).
Finally, the ultimate test for the British pound is its match-up against the Japanese yen. The pound has gently bounced around above the 50DMA, but has yet to break out above the 200DMA. Once/if that happens, I expect the pound to rally strongly against most major currencies. A lot will likely depend on how the Japanese monetary authorities respond to the Federal Reserve's success in driving down the dollar.
Jackson Hole seemed to resume the current weakness of the U.S. dollar against the Japanese yen (CurrencyShares Japanese Yen Trust ETF: FXY). The 78 level has provided firm support for some time. If it breaks, I still think the likelihood of yen intervention increases sharply. So, on such a break, I do not want to chase the yen, I instead prefer betting against it and using the British pound to do so. I discussed the latest dynamics of the Japanese yen in "Federal Reserve Minutes Renew Pressure On Japanese Yen."
The following charts show the set-ups against the yen with the British pound and the U.S. dollar:
It looks like the pound is "biding its time" against the Japanese yen
A break of the 78 level is looking increasingly likely
So, overall, it seems the British pound is well-poised to move higher from current levels over the short term, and likely the intermediate term. I closed out all of my British pound positions on Friday so that I have a fresh mind after Labor Day for confirming that my current assessment remains sufficiently accurate for opening the next round of positions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I will likely open up new bullish positions on the British pound in forex.