The British pound has experienced short-term swings this year over everything from the Iran war to domestic politics and inflation, but overall it has not departed from the well-defined range held against the dollar for the past 15 months. Technical analysis suggests that period of calm could soon give way to a sharp move.
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The pound has been boxed in between 1.3011 and 1.3867 versus the dollar, even as volatility has picked up elsewhere in markets. Beneath the surface, however, a widely used measure of volatility — 20-month Bollinger Bands — points to building pressure.
Bollinger Bands comprise a system of three lines based on averages plotted around a currency's price to show whether it is trading high or low relative to its recent average. The middle band tracks the average price over the last 20 months, while the upper and lower bands widen when the market has been volatile and narrow when it has been calm. When the bands tighten into a "squeeze," as is the case with sterling recently, it often signals that a breakout is approaching, since low volatility rarely persists for long.
While the narrowing of Bollinger Bands tends to indicate a range break, it doesn't tell in which direction that might be. Recently, however, sterling has been sliding, raising the risk that it may slip below its 20-month moving average. If so, this could open the way for a drop toward support — a point where buyers would be expected to step in — at the 100-month moving average, currently near 1.2945, according to data supplied by LSEG.
The outcome is not yet settled, though. Should sterling reverse course and close back above its 20-month average before the end of July, focus would shift instead toward a potential break above the top of the range.
What the chart shows:
(Daily markets commentary from Reuters analysts on the signals financial charts are sending - and what they might mean.)
