09-18-2017: December British Pound: It's All About Monetary Policy Committee Meetings

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calend Spread

Level Table
Other Factors
Recommendation

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Introduction

4 As is often the case with currencies, it's all about interest rates, or in this case, the Bank of England's decision to raise or not to raise rates. The Pound is soaring on speculation that the BOE will raise rate about 0.25% in November. Some people think the BOE governors are bluffing. But there is a problem with inflation in England due to the shrinking value of the Pound.

Recent comments by members of Britain's Monetary Policy Committee took many by surprise, as some formerly dovish members turned more hawkish. That seems to be entirely what is behind the Pound's recent moves.

If we note who is buying the Pound and why, it would suggest along with technicals that the Bank of England is serious and not just playing around.


Intermarket Analysis

We fed the British Pound, Japanese Yen, and Swiss Franc into a neural network to get the following result:




Parabolic Chart

December British Pound:

Parabolic Chart


Nirvana Chart

December British Pound:

Initial Chart


News Analysis

Comments by Bank of England's Gertjan Vlieghe, who is considered a policy "dove", reaffirmed a recent BOE post-meeting statements that have ramped up expectations for a UK rate hike by the end of this year. This sent the Pound to a post-Brexit high. In fact the Pound is back to the level of Brexit vote result day. The UK has robust inflation. But some say other data points may not justify the Pound at current levels. Governor Mark Carney also reinforced the message favoring raising rates.

An MUFG spokesperson for a large global investment and financial services provider upgraded forecasts for the Pound to go to 1.40 to the Dollar. He sees gains also against the Euro. This is in the wake of a substantive shift in tone at the Bank of England. Some say the BOE will raise rates as soon as November. Odds are placed at 66% vs. 20% during the previous week. MUFG cvocedes a mistake in downgrading the Pound after a BOE inflation report came out.

A Swiss Bank Julius Baer economist disagrees. He says the Pound's rally is "temporary." He believes the Bank was using a ploy to manipulate the Pound higher in order to curb inflationary pressures. Inflation is strongly driven by the Pound's weakness. The economist thinks domestic overheating is causing the inflation surge, and rate hikes at this point would be the wrong medicine.

A 0.25% interest rate hike would merely reverse the rate cut enacted in 2016 when the UK boasted one of the fastest growing economies in the G10.

The Pound gained 7% over the Yen in one week, but policy divergence might see it go higher. Fallout from the latest North Korean missile test helped bring the currency pair Pound vs. Yen to the recent spurt.

The current BOE benchmark rate is 0.25%, the lowest ever. BOE governors meetings are often referred to as "Threadneedle Street" where most recent meetings left the rate at 0.25%. The Monetary Policy Committee minutes did not commit the central bank to raising the cost of borrowing, but gave a broad hint that most members wanted to remove the quarter-point rate cut introduced by the BOE in August 2016 after the British vote to leave the EU.

The nationwide base mortgage rate in England would rise from 2.25% to 2.5% if the suspected rate hike were enacted. Average 100,000 Pound mortgages would see a 13 Pound/mo. repayment increase.

Despite very low levels of unemployment in Britain, wages have yet to move significantly higher. Average earnings did rise 2.1% in the three months prior to July, but the value of real money fell 0.4% in the period. Raising rates poses some real risks, as this cold feed through to damage the economy if hosueholds, businesses, and the financial markets react badly to faltering progress. The Bank has set a mandate to limit inflation to 2%.

Economists are generally split on whether or not the BOE will follow through and tighten monetary policy. Carney said, however, that he believes after Brexit the economy will not be able to expand as quickly as in the past, so higher rates will be needed to cool the economy even when growth rates are relatively low. Some feel the BOE is "playing a game of chicken" with financial markets and will keep this up as long as they can. The Bank did stress that rates were very unlikely to return to their pre-recession levels of more than 4% any time soon.

Inflation in Britain is being driven by the rising cost of imports. The Office of National Statistics reported earlier that inflation hit 2.9% in August alone, higher than the peak the BOE had projected in its August inflation report. Meeting minutes stressed that "slack" in the economy is being rapidly eroded which could put additional upward pressure on domestic prices. Spare capacity in the economy is being absorbed a little more rapidly than expected.


Point & Figure Chart

138.0I                                                                  T  9/15
     I IMM - Dec-17 British Pound, 62.5Kpd, $/pd   Cm.=0.05  Lim.= 3.8
     I
     I
     I
136.5I_________________________________________________________________________
     I                                                                     X
     I                                                                     X
     I                                                                     X
     I                                                                     X
135.0I_____________________________________________________________________X___
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     I                                                                     X
133.5IO____________________________________________________________________X___
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     I    O                XO                          X      O  X X    O
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     I    O          X     XOXO            X           X      OXOXOX
127.5I____O__________XO____XOXO__________X_XO__________X______OXOXOX___________
     I    OX         XO    XOXO          XOXO          X      O O OX
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     I    OX       X XO    X  O          XOXOX     X   X
     I    OX       XOXO  X X  O          XOXOXO  X XOX X
126.0I____OX_______XOXOX_XOX__OX_________XOXOXOX_XOXOXOX_______________________
     I    OX       XOXOXOXOX  OXO        XOXOXOXOXOXOXOX
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     I    OXO      XO OXO     O O  X     X  OXO O OXOXOX
     I    OXO      X  OX        OX XO  X X  O     OXO O
124.5I____OXO______X__O_________OXOXO__XOX________OX___________________________
     I    OXOX X   X            OXOXO  XOX        OX
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     I    OXOXO OXO                 OXOX          OX
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121.5I_________________________________X_______________________________________
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120.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
          111111111111111111111111
      9999000000000111111112222222111111111122222223334444555666666677778889
      1222001111222001122220011113000111122300111221230112002001112201220230
      6239370223168270413591724690346127837127067375804297456592240353053811
The above chart is giving a conventional buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical low and are in a seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "Thrust." It is giving a buy signal.

Internal Printout 1

Results of "Thrust" for British Pound (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $625 . Initial margin on a single contract is $2,176. Use of options is advised.


Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) British Pound June 1.39 Put and Sell (1) British Pound March 1.39 Put @ 0.0052 to the buy side or less.


o 1 o 2 o 3 0 4 o 5


Calendar Spread

What the Dec. - Jun. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go flat in the long run. The best time to enter or leave the above spread is when it is at -0.30 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -1.40 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the buy the near, sell the far point.





Level Table:

Level Table

The path of least resistance is up.
136.5|                                                                  T  9/15
 IMM - Dec-17 British Pound, 62.5Kpd, $/pd   Cm.=0.05  Lim.= 3.8
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120.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.019
           1 1 1 1 1 1                                                
       9 9 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 8 9           9
       1 3 1 2 1 2 1 2 1 2 0 2 1 2 0 2 0 2 0 2 0 1 0 1 3 1           1
       9 0 4 8 1 8 2 7 1 6 9 4 0 4 7 4 8 2 6 0 5 9 2 6 0 4           5


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 9/15 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                 BPZ7    December British Pound

                      High Price:  140.94
                   Current Price:  136.08
                       Low Price:  133.67

                            Risk:  0.035
                     Opportunity:  0.071

                    (O/R) Ratio =  2.017


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure + 1
Cyclicals - 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders - 1
Range/Volatility - 1
Level Table + 1
Other Factors + 1
Total + 4
Place 6 December British Pound on a Buy Watch with stoploss @ -3.55 below the get-in point when recent price is represented as "136.08".
____________________________________________________________________________________________________________________________________________C.T.