Tuesday was a roller coaster of a day for the markets as investor sentiment fluctuated from fearful to optimistic, and everything in between, during the course of the trading day. Domestic equity indexes started the day in a hole thanks to ongoing worries about the health of the European banking sector spilling over onto Wall Street. Louise Cooper, markets analyst at BGC Partners in London, said, “These concerns about solvency have created a liquidity crisis — European banks are having difficulties borrowing, both short and long term”. She added, “If banks cannot borrow for themselves, then they are highly reluctant to lend to others which results in a credit crunch”. Stocks staged a powerful rally in the final hour of trading, while gold drifted lower, closing just above $1,600 an ounce for the day.
The last hour rally on Wall Street was quite impressive as high-volume buying pushed broad-based indexes above Monday’s low-point, leading many to believe that the markets may have bottomed-out, at least in the short-term. Volatility is still lurking around the corner, however, and today investors will have to digest the latest GDP report for the United Kingdom. If the GDP data points to a concerning drop-off in economic growth, then investor worries regarding the Euro zone will likely escalate; as fears of a super-sluggish economic recovery become more and more of a reality.
The British pound will likely encounter volatility in the currency markets versus the U.S. dollar as the GDP report comes out, making the Rydex CurrencyShares British Pound Sterling Trust (FXB) our ETF to watch for tomorrow. Analysts are expecting for GDP growth to remain at 0.7% on a year-over-year basis.
The British Pound has been facing some serious headwinds versus the greenback over the last two months as evidenced by the chart below. Notice that yesterday (10/4/2011) FXB was able to hold support above its recent low of $152.20 a share. However, also take note of the high-volume trading that pushed this ETF lower on Monday.
FXB has been inching lower and the last two high-volume trading days raise doubts as to whether or not this ETF will be able to hold its head above the $152 level. Given that the fund is below its 200-day moving average (yellow line), we’re advising conservative investors to stay away as the risk of further downside outweighs the potential for upside.
The fate of the Euro zone remains clouded with uncertainty and we’re anticipating for FXB to remain in a volatile, range-bound downtrend, until lawmakers offers a concrete plan of action for restoring stability in the currency-bloc. In terms of upside, FXB may rally towards $156 a share, at which point we would strongly advise shorter-term traders to take profits. However, if FXB fails to hold support at $152 a share, then the fund is likely headed down to the $150 level. 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.