^[1]Last week we took a look at the GBP/USD currency pair, which saw the British Pound continuing to gain value against the greenback. We went over in detail what to look for that would indicate a retreat from this position. We also discussed all the indicators that could indicate a USD recovery against the GBP. After a week of watching the various news reports send this pair along the type of movement you expect from the Forex, it seems clear which way it is going to break. We are now going to bet that the British GBP will keep moving up. The play now is to bet on the GBP to continue against the USD.

What changed this past week?

While many different reports went into why we have had this read on the currency pair there are two reports that really stick out the most. Although the week started out with some positive overall news from the Euro-Zone, that was just the base. Monday saw the GBP/USD recover from its lowest point since the first of February. That was only the beginning.

The GBP finds a lot of its strength tied to how the Euro is doing. This should not be surprising to anyone considering the level of trade that takes place with the rest of Europe. Right now it appears that a Greek debt deal is on the horizon. While we have heard this song and dance before, many economists think there might be some meat and potatoes on this deal. If a sustainable deal can be made--and kept--then that could start a steady recovery for Europe. This good news helped boost both the Euro as well as the British Pound.

Bernanke didn’t help the Dollar’s cause

The other news that aided in the current GBP/USD movement came from the United States. Ben Bernanke’s report on the 7^th did not emphasize growing jobs reports or falling unemployment but continued to focus on pessimism. Bernanke’s report was extremely negative, underscoring weakness of the US economy. He mentioned the slow US recovery and the potential for traders to lose faith in the US. In fact, Bernanke was even quoted as saying "interest rates can sour quickly if investors lose confidence in the ability of the government its fiscal policy." In other words, if we lived in the 100 Acre Woods, Bernanke would not be Winnie the Pooh; he would be gloomy old Eeyore.

How does this combination affect more than just this week?

The European debt issue is definitely a long term issue but this can also be played to the British Pound’s advantage depending on how things play out in the long term. The extremely good news from the United States (which was even unexpected) of the jobs reports is already being talked down. On the other side, the long term high unemployment in both Great Britain and the Euro-Zone has been dragging those economies down even further. Add in the constant danger of the debt crisis getting out of control, and it is easy to see why these currencies have been down.

On the flip side, because these things have weighed down on the Euro-Zone for so long, and partially on Britain by extension, a sudden shift or resolution to these problems could really reverse fortunes. This is why the potential resolution to the Greek debt is such a big deal. The debt issues and worries are built into the EUR and GBP in a negative way. On the other hand the idea of a recovery or expectations of good job reports are not built into those currency values at all.

Over here, as long as the United States keeps talking down its economy, even after strong job reports, traders are likely to be more pessimistic. Considering it is an election year, plenty of negativity is sure to follow. On the other side, if we see more solid solutions to debt issues then there is a good chance both the EUR and the GBP could jump in value compared to other currencies. Considering a solid debt solution could be the first step towards an actual recovery, and there is a lot of potential for the GBP to increase strongly with any upswing.

The long and short of it

When it comes to the GBP/USD currency pair, the safe bet short term is to expect the British Pound to continue to gain in value. If more reports come in confirming a solid debt solution for strapped European nations, then we can expect the British Pound to climb even higher.

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If you are in this one, I would look to move your stop loss up a little to get closer to a breakeven point. My Trend Finder system should trigger any time now to confirm this move.

Good investing,

Jason Fielder

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