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Cable set to swing higher

The US dollar is on its knees. The greenback has been weakening against a whole bunch of other currencies in recent weeks, thanks partly to the ongoing impact of the Federal Reserve's quantitative easing programme. Even our own British pound has been enjoying the benefits, resuming the uptrend that it began a couple of years ago following its dramatic crash during the credit crisis. And, I think, the pound could be set for further gains versus the dollar in the very near future.

Let's briefly review the action of the last couple of years. The sterling/dollar rate - known among traders as "cable" - rallied strongly in 2009, reaching an August peak of $1.7043. It then retreated, but made a higher low last May and has since made progress back towards the $1.7000 level. Why is this level so significant? The key point is that it has provided support and resistance on numerous previous occasions as you can see on this monthly chart going back over 15 years.

The pound's outlook may be more a story of dollar weakness than of sterling strength. First of all, the Fed is set to continue printing new cash into June and using it to buy bonds. This activity has proved negative for the greenback to date. The US housing market remains in a terrible state, with a shockingly low number of properties changing hands and prices as firm as blancmange. And there are some signs that its wider economic recovery may be faltering, just as the quantitative-easing stimulus comes to an end.

Mind you, there is still a positive case to be made for sterling. The UK economy is growing once more, with expansion of 0.5 per cent recorded in the first three months of this year. Sure, it's not runaway stuff. But combined with the effect of rising prices, it could lead to an interest rate rise sooner rather than later, causing sterling to appreciate. Also, the government's austerity programme could improve outsiders' perception of the country's creditworthiness, which would also boost sterling.

I, therefore, am keen to speculate that the pound goes on to reach $1.70 before long. And rather than using a spread bet or a similar option, my preferred vehicle is a fixed-odds financial bet, specifically a "one-touch" trade. This involves my specifying to the fixed-odds provider that I believe the pound will touch $1.70 within a timeframe of two weeks. With the pound around $1.65 as of 3 May, BetOnMarkets was offering a return of 420 per cent for this bet.

This is an excellent fixed-odds trade in the making for me and certainly one where there are clear advantages over spread betting.

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Jon McFarlane is a full-time trader who also runs www.systemsfortraders.com, the leading site for reviewing trading systems available to the general public. Read his latest review at http://bit.ly/kYiUcA.

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By Jon McFarlane,
05 May 2011

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