Foreign exchange markets have been influenced by central bank activity in ways that are somewhat uncommon as several policy initiatives have taken the market by surprise. These types of factors have not been isolated to specific areas as the Federal Reserve, European Central Bank (ECB) and the Bank of England have all undertaken measures that have forced currency investors to reassess their expectations.
The Bank of England has been the most recent example of this as it recently raised interest rates as a means for staving off inflation in the national economy. Inflation is often a larger problem than it may typically be seen in other developed economies.
So, these types of monetary policy moves at the central bank often will make a number of these moves in succession in order to prevent price instability at the consumer level. Profits can be captured in these trends for anyone that is looking to Trade Forex South Africa and position for the improved outlook in currencies.
Higher interest rates are generally bullish for a currency, which means there is now a supportive tailwind for investors that are long in assets tied to the value of the British pound. Most often, trades are implemented here using currency pairs like the pound-euro or the pound-dollar. When we look at the activity in both over the past several months, we can see the markets had anticipated these interest rate increases to some extent as rallies in the pound-dollar have been readily apparent.
British Pound Trading Outlook
Since the rallies in the pound-dollar have been clear since the end of April, it is best to continue viewing the GBP/USD within the context of its uptrend. We have seen some short-term weakness in the pair back toward the middle 1.32 area, which can be viewed as a discounted price within a strong uptrend that should continue if the Federal Reserve refuses to raise interest rates before the end of this year.
Key resistance levels come in just above 1.36 and an upside break here would confirm the strength of the outlook in ways that anticipate a move back into the 1.40s before the end of this year. In the other direction, we would need to see a break back through the 1.28 level in order to assume the current uptrend has run its course. This means stop losses can be placed under this area as they should protect market traders from a reversal in a case where the current positive outlook starts to deteriorate.
