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Forget Worrying About the Euro -- Focus on the Pound!


Intermediate- and long-term prospects are somewhat bleak for Great Britain's currency and equity prices.


The Euro/British Pound Currency Cross (EURGBP):

  • Last week, there were reports that famed currency and commodity investor James Rogers was calling for the imminent collapse of the British pound. He has since denied making any such statements, but did express his concern over the Britain's economic and currency conditions over the intermediate to long-term.

  • I want to take today's report to take a look at how the British pound is trading against both the euro and the yen to see where the big money feels it may be headed. Additionally, I'll be analyzing the chart of the EWU, the index ETF for Great Britain.

  • The chart above shows the euro/British pound currency cross on a monthly basis since the cross started trading back in 1999.

  • The cross appears to be in the early stages of wave 3 of V in the long-term count. Based on this chart, we can extrapolate one possible upside target for wave V by measuring the magnitude of wave I and adding that figure to the bottom of wave IV. In this case, that calculation gives us an approximate upside target of 0.99188 (versus Sunday night's action in the .89691 area).

  • With all of the harping recently on Greece's issues as well as those of the European Union, it's hard to believe that Great Britain could be any worse with respect to their economic and currency issues -- but the direction of things is relatively clear for the British pound versus the euro. How bad must things be in Britain if the charts are telling us this bearish story for the pound?

  • A look at the EURGBP on a weekly basis instead of a monthly basis tells me that the upside potential for the wave-V move may be much higher than the 0.99 area identified on the monthly chart.

  • On the weekly chart, the EURGBP does appear to be in wave 3 of V with an upside target of 0.98403 for wave 3. With waves 4 and 5 still to come, it appears that the .99 area will be far too conservative a target for the EURGBP. There will be some short-term resistance areas along the way, however, so unabashed bullishness for the EURGBP would be ill-advised at this point. In other words, we need to look at the daily chart to get a better gauge of the where to enter long trades on the euro or short trades on the pound sterling.

  • This chart is the daily chart of the EURGBP and it tells me that the cross is getting a bit overextended and may be in for a pause or pullback very soon (notice the RSI nearing 70).

  • Based on this chart, a good entry point would be on a pullback to the peak of wave i at 0.88392 with short to intermediate-term targets in the low 0.90s.

  • It's always important to look at a currency versus more than one cross in order to get a better read on the overall health of the currency (rather than just relative strength or weakness against one currency).

  • So, in addition to the study of the pound versus the euro above, I want to study the pound against the Japanese yen.
  • The first chart is the monthly chart of the GBPJPY going back to its inception. In this chart, the easy and quick answer would be that the cross is in a new primary wave 5 lower with downside price projections in the 100-110 area.

  • However, I cannot rule out the possibility that the GBPJPY is still in the middle of a corrective wave 4 which would take the cross up a bit more before wave 5 commences and moves the cross lower. In order to better determine which case is the reality, we need to look at the weekly and daily charts below.
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No positions in stocks mentioned.

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