Domestic equities took a breather on Tuesday, following three days of stellar gains. The Dow Jones Industrial Average struggled to make further headway during the day’s trading session, but the index did manage to hold support above the psychologically important 12, 000 level. “The reflex rally in the equity market that began last Thursday appears to be slowing down. Given the rapid three-day bounce off last week’s low, it is not surprising to see some traders consider taking quick profits,” Fred Dickson, chief investment strategist at Davidson Cos., wrote in an email. Oil tacked on another dollar, jumping to just under $105 a barrel. Gold on the other hand was rather weak and its safe-haven status wasn’t enough to attract investors, even amidst global uncertainty. The precious metal drifted sideways and floated near the $1,430 an ounce mark, ending the day flat. Agricultural commodities were broadly lower as well, with soybeans, corn, and wheat trading lower ahead of next week’s U.S. planting report.
Today, the Bank of England is scheduled to release the minutes from its most recent Monetary Policy Committee meeting in which members voted on how to set current interest rates in the country. This detailed report of how members voted looks to be especially important given inflation readings that came out last night. In the report, the United Kingdom’s Consumer Price Inflation came in at 4.4%, which was higher than the expected 4.2%, and even higher than January’s rate of 4%, suggesting that the rate of price increases is rapidly accelerating [Inflation-Fighting ETFs Back In Focus].
The Monetary Policy Committee has recently come under pressure, as it has continued to keep interest rates historically low (0.5%), while inflation data continues to exceed the bank’s official target of 2%. During last month’s meeting, the majority of the nine-person committee voted to hold rates steady, while three members advocated for a modest rate increase. The Bank will have to consider the path of least resistance when it comes to encouraging growth, while also keeping the lid on inflation as energy and commodity prices continue to rise. Today’s minutes release will surely attract attention as traders and investors look for insights and hints of future monetary policy changes to come, especially given the rapid increase of inflation in the British economy [see all the ETFs that offer exposure to the UK with our Country Exposure Tool].
Technical View Rydex CurrencyShares British Pound Sterling Trust (FXB)
Investors interested in gaining exposure to the British Pound can look to Rydex, and specifically at their Pound Sterling Trust (FXB). This fund tracks the performance of the British Pound, based on the GBP/USD foreign exchange rate, relative to the U.S. dollar. Before trying to gauge possible levels that FXB may rise or fall following today’s release, it important to look at the big picture and understand where the fund is now, relative to its entire trading history.
Consider the daily chart above (2007-current). FXB is currently near the bottom of its trading range, considering that the fund consistently traded above $190 a share prior to the most recent financial crisis. After tumbling to an all-time low of $136.07 a share in January of 2008, FXB has since then remained range-bound, trading above $140 and under $170 [also see Why ETF Tracking Error Occurs And How To Avoid It]. During the second half of 2009, FXB struggled to break above the $165-$170 level, and after breaking its 200-day moving average (yellow line), the fund gradually sank and hit lows of $142 a share.
Consider the 1-year daily chart above. Since June of 2010, FXB has been trending higher, and the fund is currently trading above its 20, 50, and 200-day moving averages. If the minutes suggest that a rate hike is closer than some think and any hawkish comments are made in the report, then FXB will likely surge past $163 a share, and rally to anywhere between $163 to $170 in the coming weeks [see FXB Fundamentals].
Likewise, if the bank maintains a cautious outlook and members express concerns over a rate hike crippling growth in the nation, investors will be tempted to sell the pound, with the underlying reason being that the Bank of England is failing to take precautionary measures against inflation (the real enemy of any currency). Any dovish commentary that the Monetary Committee makes will likely be magnified, and thus it’s possible that FXB may fall. If we draw a Fibonacci Retracement from the fund’s most recent uptrend low to its peak (12/22/10-3/7/11), then we get likely levels that FXB may retrace down towards. If investor sentiment turns bearish, FXB will likely tumble lower to anywhere between its 20 and 50 day moving averages, which align nicely with the 23.6% and 38.2% retracement levels ($160.57-$159.07). If FXB closes below $160 a share by the week’s end then the current uptrend needs to be re-considered, as the fund could quickly sink even lower to its 200-day average near $156 a share [see more technicals of FXB here].
Traders and investors alike are advised to stay out of the market and wait until after the Bank’s minutes release and are encouraged to fully digest the nuisances of the statement before making any moves to establish long/short positions in FXB. 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.