The British Pound Is Looking To Head Lower? (FXB)

January 6, 2012 12:49pm NYSE:FXB

Richard Rittorno: The GBP/USD currency pair sold off sharply by over 126 pips yesterday suggesting further downside weakness is likely after conformation of the selloff followed through to today’s session.

This round of weakness comes on the heels of three failed attempts to break above resistance level in the $1.5770 area.  Trader’s sentiment focus has now shifted to the support level of $1.5359 set back in December and, beyond that, October’s low of $1.5270.


A break below October’s low will expose price action to the $1.5000 level.

The two-day selloff is being confirmed also by a bearish move in the relative strength indicator (RSI).

Alternatively, a price break above the $1.5770 to $1.5779 levels will expose price to the late October / early November price level at $1.6000.

With the GBP/USD trading in a newly formed — and probably short-lived — trading range of $1.5770 to $1.5330, traders have several ways to take advantage.

First, consider placing stop entry orders 15-20 pips above and below the newly formed channel to catch a breakout move on either side.

Or look for a reversal candle formation — a morning star, evening star or engulfing formation — on either the top or bottom of the channel and set protective stops outside f the range.

Bottom line: Traders can take advantage of the GBP/USD with a nearly 400 pip channel and/or breakout potential that can statistically match the size of the channel.  Those without currency accounts can get exposure to the GBP via the CurrencyShares British Pound Sterling Trust (NYSEARCA:FXB) ETF, which seeks to track the price of the British pound sterling, minus trust expenses. The fund seeks to reflect the price of the British pound sterling.

Traders can also reduce risk of shorting the ETF via PUT options.

Remember, traders when the GBP/USD price moves higher the British Pound Sterling value is increasing and the U.S. dollar is decreasing while move down in the GBP/USD indicates a weaker British Pound Sterling and stronger dollar.

For example, with sentiment focusing on the GBP/USD moving lower, trader will want to short or buy puts in the FXB ETF to mimic the FOREX market.

Written By Richard Rittorno For Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging  Market investments. CNBC Emerging Markets Contributor Tim Seymour leads  the team of Emerging Money to bring you cutting edge global news and analysis.

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