A Hit Maybe...But Not a Pounding


RELAX - There are many out there still projecting quite a bit of weakness in the Pound. After all, there is so much uncertainty out there around the Brexit outcome, that it makes sense right? Well, I'm not so sure and I'm actually even more confident that this won't be the case. Sure, short term there is risk for downside. And we could even see a drop that takes us a little below 1.3000. But I don't think much more than that and would use a previous breakout point from earlier this year at 1.2775 as a frame of reference. In my view, the break above what had been a post EU Referendum range high at 1.2775 was a big time break and sent a message that the Pound had finally bottomed out longer-term.

cartoon oct 19

COOLER HEADS - At the moment, we have seen renewed worry as the Brexit negotiations ramp up, and we have also seen renewed demand for the US Dollar as the Fed looks to raise rates again this year and US economic data supports the Buck. But all of this is really besides the point. The point here is that worst case Brexit scenarios were priced in well ahead of the EU Referendum and those worst case scenarios were exactly that! The projected exchange rate in that scenario was 1.1500-1.2000 for the Cable rate and we got there after the market naturally went to panic mode and feared the worst when it wasn't even thinking the Brexit vote would actually win out. But now that we've had time to digest it all, the level of panic isn't the same and that worst case isn't going to happen. As always, cooler heads will prevail here.

SHORT-TERM HOWEVER - Of course, this also doesn't mean the Pound will shoot up like a rocket. There's going to be a lot of back and forth as this uncertainty plays out. This is the way things go. And don't forget, there are other things going on that impact the Pound outside the UK. This is the FX market after all and it's a game of relatives. If the US Dollar is gaining favor, it will weigh on the Pound. And so, while I definitely see risk for short-term weakness in the GBPUSD rate, I don't think we see much more weakness here, which in my view, sets up a fantastic opportunity to be looking to buy into dips.

There's still risk for the Pound to trade lower but that should only be short term.

THE TAKEAWAY - Several days back on an initial drop (which we actually had played on the short side and money some good money with), the rate stalled out ahead of 1.3000. I had been looking to buy a dip at or below 1.3000 and we didn't get there. This leaves me still wanting to take the position and I will be looking for that shot. Ultimately, I see the UK either pressured into a deal which may not be ideal but better than a disaster, or the UK finds a way to improve its position globally, making the Pound more attractive. Technically speaking, markets move in cycles and we are also coming out of what looks to be a cycle low in the Pound, leaving plenty of room for relative outperformance going forward. So stand by and let's see if we can get in.

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