British Pound Dominates in the Forex Markets, But Rally May Prove Short-Lived

The British pound was easily the strongest of the majors on Wednesday, as economic news surprised to the upside. According to the British Bankers Association (BBA), UK mortgage approvals jumped to 27,685 in April from 26,671, with the average value of the loan rising to 129,100 pounds from 128,600 pounds. While the status of approvals has been uneven in recent months, loan values have been steadily climbing from their 4-year lows of 116,100 pounds in December 2008, suggesting that the UK housing sector may be embarking upon a slow but steady recovery. That said, with the UK deep in recession and unemployment rising, home values have little chance of even coming close to the record highs we saw in mid-2007.

Looking ahead, the GBP/USD break above 1.60 may be a false one as signs of reversal have emerged. Though FXCM SSI – a contrarian indicator – was still negative at the time of writing at -1.84, the GBP/USD rally seems to have spurred exceedingly bullish sentiment. Indeed, major media news articles whose titles highlight the pair’s push above 1.60 serve as a prime example, since it is at these points that we tend to see reversals due to sentiment “extremes.” Meanwhile, daily RSI for the pair remains overbought, suggesting that the British pound may experience a correction in coming days.