Understanding seasonal patterns in currency trading
Understanding seasonal patterns expands opportunities for currency traders looking to maximize their profits and make informed decisions in the foreign exchange market. Seasonal patterns refer to recurring trends and patterns that emerge in the currency market during specific times of the year. Various factors influence these patterns, including economic indicators, geopolitical events, and market sentiment.
One typical example of a seasonal pattern is the "summer slump" observed in many currencies, including the British Pound (GBP.) During the summer, trading volumes tend to decrease as market participants take vacations and liquidity dwindles, resulting in reduced volatility and lower trading activity.
Another seasonal pattern that currency traders closely monitor is the end-of-year sell-off. Toward the end of the calendar or fiscal year, investors often engage in profit-taking and portfolio rebalancing, which can trigger a sell-off in certain currencies. This sell-off is driven by tax considerations, fund manager performance, and market positioning ahead of the new year. The end of fiscal or calendar quarters can create seasonal patterns. Central banks may have repetitive expenditures during this time resulting in currency repatriation or perhaps expenses where they purchase other foreign currencies. The upcoming seasonal trade we discuss will result from the GBP declining into the end of their fiscal 2nd quarter in September.
The United Kingdom (UK) is an island. It relies heavily on imports, requiring the UK to regularly convert GBPs to multiple foreign currencies to support its import needs throughout the year. The United States Department of Agriculture (USDA) reports: "The United Kingdom's agricultural trade depends heavily on imports, especially consumer-oriented and agricultural-related goods. The United Kingdom (UK) is the world's fifth-largest importer of agricultural and related goods and a large market for US products."
Traders may also consider fundamental factors such as economic data releases, central bank policies, and geopolitical events that could impact currency movements during specific seasons to take advantage of seasonal patterns.
The current condition of the GBP
The UK gave a positive growth surprise when it announced its GDP expanded by .2% in the second quarter, as market participants expected signs of a pausing economy. The Bank of England (BOE) may now have the green light to continue its tightening monetary stance. The markets feel confident the BOE will increase rates by another 25 basis points next month, then add one increase before considering a pause. Much like the United States (US), the BOE will be data-driven with its next direction, with persistently high inflation continuing to haunt the BOE.
Has this possible transitioning phase from the BOE been factored into the GBP prices?
Technicals
Source: Barchart
The weekly GBP/USD pair chart illustrates a weekly uptrend in a larger timeframe downtrend that terminated near 1.03 and came close to parity with the US dollar. The current uptrend began in September 2022 and is approaching its first anniversary.
Will the August doldrums and low volume result in a correction for the GBP?
Traders of Financial Futures (TFF) Report
Source: CMEGroup
The TFF report for leveraged funds illustrates the recent rally (yellow line) since September 2022. The week price peaked in the current uptrend leveraged funds increased their long position (blue bars) to the most significant amount since 2018, almost a year after the uptrend started, giving the appearance of a short-term top. The recent three weeks since the peak reveals that the longs are liquidating positions each week as we enter August.
Seasonal Pattern
It's important to note that while seasonal sell patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
Source: Moore Research Center, Inc. (MRCI)
MRCI research has uncovered a pattern where the GBP has closed lower on approximately September 02 than on August 03 in 12 of the recent 15 years for an 80% win rate. During this period, the seasonal pattern had three years without a daily closing drawdown.
Fundamentally MRCI has observed, "The pound has usually traded lower into September on its way to a significant low in October at the end of the second British fiscal quarter."
Prices are currently trading near the August 03 closing price, allowing traders to consider if this trade meets their trading strategy and risk criteria to participate still.
In closing
In this article, we dove deep into the analysis of a seasonal sell pattern and its impact on the future of the British Pound. Supporting the trade, the TFF report revealed a significant six-year high for leveraged funds long positions leading us to think we likely saw a temporary top. August trading will get less liquid as we get deeper into the month as families will be taking vacations before school and back to work for some begins. MRCIs research showed that the GBP had declined 80% of the time over the past 15 years.
The question remains, will the seasonal sell and the other factors mentioned be enough to reverse the GBP uptrend long enough to profit from this seasonal pattern?
Traders could use the GBP/USD pair to participate using the spot forex market. They may also use the standard-size futures contract 6B (Barchart B6) or the micro-sized M6B.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
