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.

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
Advertisement
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

Visit/currencies/600640/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
Visit/investments/alternative-finance/bitcoin/601319/bitcoin-has-just-halved-again-what-does-that-mean
Bitcoin

Bitcoin has just “halved” again – what does that mean, and should you buy in?

Cryptocurrency bitcoin has just hit a milestone, where the rate of new coins being produced halves. Dominic Frisby explains what that means.
13 May 2020
Visit/investments/alternative-finance/bitcoin/601295/is-bitcoin-going-mainstream
Bitcoin

Is bitcoin going mainstream?

The cryptocurrency suffers from all the problems it has always had and that may never change. But digital currencies more broadly may be about to take…
9 May 2020
Visit/economy/global-economy/601029/the-charts-that-matter-the-helicopters-are-unleashed
Global Economy

The charts that matter: the helicopters are unleashed

In a week when all sense of what's normal went out the window, John Stepek looks at what's happened to the charts that matter most to the global econo…
21 Mar 2020

Most Popular

Visit/economy/global-economy/601420/james-ferguson-the-virus-the-lockdown-and-what-comes-next
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020
Visit/investments/stockmarkets/601423/as-full-lockdown-ends-what-are-the-risks-for-investors
Stockmarkets

As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020
Visit/investments/property/601411/can-the-uk-housing-market-escape-a-slump
Property

Can the UK housing market escape a slump?

The Bank of England is predicting a 16% slump in house prices.
29 May 2020