Sterling strength: too far; too fast?

Dave Floyd is a professional FX and stock trader based in Bend, OR and the
President of Aspen Trading Group. Dave’s approach to FX combines technical
and fundamental analysis that results in trades that fall into the swing
trading time frame of several hours to several days. For a free trial to
Dave Floyd’s Daily Forex Alerts

While there is an undeniable inverse relationship between the direction of the
Dollar Index (DXC) and GBP/USD which has played out in the last week or so (see
chart below), the flip side of the equation would question why GBP is so strong
against other, more ‘solid’ currencies?

We are becoming a bit suspect of the exceptionally large move higher in sterling
on the GBP crosses as the fundamental backdrop, historically speaking, does not
warrant such a dramatic rise. Those looking for mean reversion trades will want
to consider shorts in GBP/CAD, GBP/NOK as well as GBP/SEK.

Canada, Norway and Sweden all have positive macro backdrops in terms of the
current account surpluses’ — if the market continue to look for currencies with
more attractive fundamentals, which I think is the case, the crosses noted above
are worth looking at for medium-term shorts (several days to a couple weeks in
duration)

We are also long EUR/GBP based on the same premise.

As always, feel free to send me your comments and questions.

Dave

Aspen Trading Group