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Sterling/Dollar breakout! Can it be trusted?

We have seen Sterling/Dollar breaking sharply higher in the days since the UK General Election result. The move has resulted in a move above the key resistance at $1.5550. The market seems to be backing further gains for sterling depite already having seen a bounce of over 1100 pips since the bottom in mid-April. The big question is whether this is a breakout that can be trusted. I think it can.


I thought I would show a few charts that might help to shed some light on the technical move that suggests that the sterling bulls are now in control and that corrections should be seen as a chance to buy.

The base pattern completed now on a move abvoe $1.5550 (which should be confirmed today with a second daily close above the resistance) implies $1.6370. From current levels, this sounds like a significant rally, but in terms of where Cable has been trading it is simply a retracement back towards levels seen in late September. I would though be more inclined to call a retracement back tow the 61.8% Fibonacci level of the big bear trend, which gives an upside reaction target of around $1.6190, a further 500 pips of recovery (see the weekly Fibonacci chart below).

Volatility is a positive for Cable now. The daily Bollinger Bands (2.0 SD around a 20 dma) show that volatility is strong and expanding with the breakout hugging th upper band. This is a time to stick with the band. Also the chart below shows that the market is backing the breakout. The Accumulation/Distribution (an indicator that weights the volume according to the relationship betweeen the daily close and the bar range) is anow at its highest since October.


Weekly charts also suggest the bulls are taking over. The move above the 38.2% Fibonacci retracement of the big sell-off from $1.7191/$1.4563 was clearly a big resistance at $1.5567. Overcoming this level has now opened upside towards the next retracement, the 50% Fibonacci level at $1.5877.

weekly fib

Also the Weekly SARs (Stop & Reverse) have turned positive, whilst the weekly RSI is advancing strongly with further upside potential (having also posted a bullish divergence at the bottom).

weekly sar

For the immediate prospects, the momemtum is stong, and I would be looking to use any intraday weakness back towards the support band of the breakout between $1.5500/$1.5550 as a chance to engage in medium term long positions. There is more to run in this Cable breakout. The Bank of England’s Quarterly Inflation Report tomorrow is likely to generate some volatility, however this should be used as a chance to buy.

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