This Wednesday, the US Federal Reserve kept its benchmark interest rate unchanged at a range of 0 to 0.25 percent. The rate outcome was widely expected. However, unlike in the previous FOMC meetings, the decision was not unanimous and Thomas Hoenig voted against the policy action because he believes that “exceptionally low levels of the federal funds rate for an extended period” are no longer warranted. Having said that, I expect the US dollar to outperform going forward as interest rate differentials between the United States and other lower yielding countries like Switzerland start widening.

The pound soared through the Asian and European session Thursday; but the market would ultimately retrace those gains by the time US liquidity took over. This hearty reversal was partly due to reports that the UK government would try to raise capital by selling off its stake in three of the nation’s largest banks (a move that could highlight the market’s cynicism and would in essence represent a massive sell order in already fragile economic conditions). However, the more prominent driver for this U-turn was risk the underlying shift in risk appetite. The pound may not hold a consistent position as a high or low-yield currency; but its fundamental value and risk profile do allow for distinct reactions when investor sentiment changes.

For those that were trading on today’s sterling swing, the volatility the currency evoke would have made for good trading (providing you were heading the right direction at the right time). However, from where we are now, the markets seem to be recoiling for a more meaningful push going forward. For my existing EURGBP short, I will stay short with the trailed stop and maintain an objective much further down. Pushing through 0.8675/50 will be a critical step towards developing a larger bear trend. For a new setup, I think GBPUSD has developed a very clear wedge formation. A rising trend channel has developed sicne the beginning of the year; and support is founded in a rising trend of lows from 12/30 to 1/7 to 1/26. For temporary resistance, we have a pivot near 1.6275; but the 100-day SMA at 1.63 could offer its own pressure. A breakout in either direction could point to good opportunities; but I would prefer a clear break of the channel (a bearish resolution). In the meantime, if the market is waiting for a catalyst to force a breakout (perhaps the US GDP report); then there may be an opportunity to range trade in the interim.

Sterling has fared considerably better than its immediate European counterpartsagainst the US Dollar and Japanese Yen amid increasingly acute risk aversion, with relative valutions likely the force underpinning prices considering GBP is now substantially undervalued (close to 20%) against EUR and CHF on a purchasing power parity basis. Weekly charts see GBPUSD is stalling near the 1.62 level, the mid-line of a range that has confined prices since April 2009, but dailies point higher with a near-term rising channel apparently taking shapre. I will remain on the sidelines for now, looking for the bullish correctino to continue to the long-term range top near 1.6740 and look for selling opportunities from there.

The GBPUSD continues to trade above the 20-Day SMA at 1.6174 which has kept me on the sidelines for the pair. The current developing wedge formation warns of a potential breakout with 1.6100 and 1.6300 as target levels to watch for entering positions. Currently I remain short the EUR/GBP with my target 8523-8/18 low. The credit troubles in Greece may only be the beginning for the region which may continue to limit upside potential for the single currency. Meanwhile, U.K. inflation above the BoE’s target level of 2.0% will put pressure on policy makers to begin tightening, adding sterling support.

Following up with the EUR/GBP short recommendation from earlier this week, the two-day decline triggered the entry from 0.8705, with the exchange rate slipping to a fresh monthly low of 0.8613. However, as the daily RSI continues to push deeper into oversold territory, I lowered the stop to 0.8650, the previous week’s low, and may look to book my profits this week as the Bank of England and the European Central Bank is scheduled to announce its interest rate decision next Thursday. However, I will maintain the position until the end of the day and will look for any cues that may lead to a retracement in the euro-pound. Nevertheless, the ECB and the BoE is widely anticipated to maintain their current policy next month, but commentary following the meeting is likely to stoke increased volatility in the exchange rate as investors weigh the outlook for future policy.

We continue to look for opportunities to buy the cross on dips as the market appears to be overextended on a short-term and medium-term basis. Despite the latest intraday setbacks, we believe that the 1.5415 yearly/multi-year low should remain intact, with the hourly chart showing the potential formation of the right shoulder of a major inverse head & shoulders pattern. As such, we will look to establish a playable long trade on a test of the 78.6% fib retrace off of the latest moves which comes in just under 1.550. STRATEGY: BUY @1.5495 FOR AN OPEN OBJECTIVE; STOP 1.5345. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY. 3X LEVERAGED.