Domestic equity indexes dipped into red territory yesterday as “taper talks” stole the headlines with no other major economic releases taking place on the day. The bulls shifted gears into profit taking mode after Fed official Charles Evans reminded investors that the economy would have to deal with a reduction in bond-repurchases later this year, and potentially as early as fall [see Optionable ETFs For Every Investment Objective].
Our ETF to watch for the day is the CurrencyShares British Pound Sterling Trust (FXB, A-), which may experience volatile trading as investors react to the overnight inflation report from the Bank of England.
Consider FXB’s one-year daily performance chart below. The British pound has endured a harsh decline in 2013 as Europe’s grim outlook has done little to bolster the U.K.’s growth prospects, which has in turn welcomed bearish pressures in the currency market. From a technical perspective, FXB offers some attractive upside potential at current levels; however, upon closer analysis of the chart it becomes clear that bullish momentum has evaporated here. Notice how FXB has tried and failed to summit the 200-day moving average (yellow line) on two occasions since rebounding off support (red line); furthermore, this ETF has been oscillating around its 50-day moving average (blue line) for four months now, showcasing uncertainty among long and intermediate-term investors looking to take a position in this beat down security [see How To Take Profits And Cut Losses When Trading ETFs].
Given the largely uncertain fundamental outlook for the pound coupled with FXB’s “choppy” chart, we advise conservative longer-term investors to hold off from jumping in long until this currency ETF establishes more definitive support with positive catalysts on the horizon [see 7 Rules ETF Day Traders Must Know].
If the latest inflation report suggest a healthy level of price increases is taking place, FXB should have the wind at its back; in terms of upside, this ETF must summit stiff resistance at the $154 level. On the other hand, grim economic prospects will add further weight to the bearish trend at hand; in terms of downside, FXB has major support around $148 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.