Advertisement

Currency Corner: is the pound brewing up a multi-year bull market?

The pound has been stuck in a range against the euro while we’ve endured seemingly endless political chaos. There’s still a way to go yet. But when we do get some clarity, the rally could be huge, says Dominic Frisby.

190621-the-pound

Hello and welcome to this week's Currency Corner.

I am going to take a look at the pound again today.

However, I am going to try and ignore all the noise about the Conservative Party leadership contest; Brexit; the Federal Reserve and European Central Banks; and any other political or economic developments.

Advertisement - Article continues below

Instead, I will focus on a simple saying: "the bigger the base, the higher in space".

The pound is forming a solid base

The idea behind that saying is fairly self explanatory. If an asset whether it's a currency, an equity, an index or a commodity makes a clear base, then the rally which eventually follows off that base will be considerable. The more time involved in forming that base and the more clearly defined it is, the more bullish it is for the ensuing rally.

With that in mind, here is a chart of the pound against the euro over the last four years, since before the Brexit vote.

190621-CC01-pound euro

You can see how, back in 2015, the pound was trading healthily, going as high as €1.44. This was the high point in a bull market that began all the way back in 2009 with sterling almost at parity with the euro at €1.02.

Advertisement
Advertisement - Article continues below

In late 2015, things reversed, and the slide began. By April we were at €1.24, we then got a rally into the referendum, when the general perception was that Remain would win. It didn't, of course, and the great sterling sell-off commenced.

Advertisement - Article continues below

However, since then the pound and the euro have traded in a clear range. The top of the range being the €1.18-€1.20 area, and the bottom around €1.10. I've defined it with the dashed red lines in the chart above.

We have been in that range for three years now, and over time it has narrowed.

In other words, sterling is setting up for a considerable rally against the euro. The €1.40 to €1.50 area looks eminently possible to me.

The pound could remain in limbo for some time yet

Before you start rushing out to buy sterling, let me just stress we have Brexit to resolve first. There are still so many potential outcomes. The next Tory leader may face a vote of no confidence in parliament and a general election. Whoever he appoints as Brexit secretary may persuade the EU to agree an exit along the lines of the deal originally struck by David Davis and Steve Baker. It maybe that parliament does not agree whatever deal is struck. It maybe that a Remain party or coalition wins the next general election and we don't end up leaving at all. It may be that the Brexit Party comes out victorious. There are still so many potential outcomes.

Advertisement - Article continues below

Until we get some clarity on how this is all going to resolve, I don't see how sterling can stage any meaningful rally. It will remain stuck in this range against the euro. I rather suspect we will have a few more months of limbo, but that by the autumn a clearer outcome will be apparent.

The prognosis then is that we remain in this range between, say, €1.10 and €1.20 for a while longer. But all that means is that this multi-year base will get even bigger which adds even further potential to the rally that follows.

It might be that in the political chaos of the next few months we break to the downside of the range. We will probably need to go back and retest the €1.08-€1.10 area. But the fact remains that, technically, we have been forming a multi-year bottom a base on which an multi-year bull market can follow.

Advertisement
Advertisement

Recommended

The currencies to bet on this year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Turkey’s next currency crisis approaches
Currencies

Turkey’s next currency crisis approaches

The Turkish lira is down by 14% against the dollar this year and has been trading above the ₺8/€1 level for the first time in two years. 
7 Aug 2020
The US dollar is ripe for sharp depreciation
Currencies

The US dollar is ripe for sharp depreciation

The US dollar – usually considered a traditional “safe haven” refuge – suffered its worst monthly performance in nearly a decade last month as risk-av…
7 Aug 2020
Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020