Equity indexes all over the world turned for the worst as Italian debt woes stole the headlines and sparked a massive sell-off across virtually every corner of the market. Investors dumped stocks as yields on 10-Year Italian bonds soared over 7%, leading to widespread fear that EU leaders are not well prepared to deal with a full blown financial crisis in case one potentially develops [see our Euro Free Europe Portfolio]. The U.S. dollar took on safe haven appeal and soared amidst the uncertainty in the currency markets, while gold struggled to keep its head above the $1,800 level. Futures prices for the precious yellow metal sank desperately lower alongside equity indexes, closing near $1,770 an ounce for the day.
With all eyes on Europe, investors will shift their focus to the Bank of England later today when it releases its latest interest rate decision. More importantly, investors will pay close attention to the economic outlook issued after the rate decision itself, looking for insights that may provide clues as to how the bank plans to ensure stability as the Euro zone drama intensifies [see Three Long/Short Ideas For Euro Zone Debt Drama]. The release of the economic commentary may lead to volatile trading in the currency markets, which makes the Rydex CurrencyShares British Pound Sterling Trust (FXB) our ETF to watch for today.
FXB has declined considerably since breaking below its 200-day moving average (yellow line) back in the beginning of September of this year. When considering the chart below, it appears as though FXB has carved out a double-bottom right around $152 a share, seeing as how this ETF held support above this level twice, first on 9/22 and next on 10/6/2011, although it did slip a few pennies lower down to $151.96 a share. Despite the strong comeback since bottoming out in early October, establishing a long position at current levels is still quite speculative since FXB has failed to summit the $160 level for two week in a row now [see FXB Returns].
FXB is in a very tough spot at the moment from a technical perspective, because unless the fund holds support above $158 a share following the interest rate decision, it may quickly and violently sink back down to the $156 level [see also Ten ETFs No One Is Thankful For].
If the Bank of England issues a surprisingly optimistic economic outlook, then the British pound could appreciate in the currency market. Likewise, FXB may work its way higher back to $160 a share, at which point we would advise short term traders to lock-in profits, seeing as how this is an area of resistance that the fund has failed to summit over the past two weeks [see FXB Technicals]. On the other hand, if the economic outlook is worse-than-expected, selling pressures could bring down FXB back to $156 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.