As we've seen, economics is pretty useless for determining where currency markets are going. An alternative approach is to use technical analysis or 'charting'. Technical analysis tracks price movements on a graph in attempt to pick out trends, develop price targets and get warning of when the tide is turning.
Technical analysis isn't everyone's cup of tea, though. Economists are famously scathing about its merits, dismissing it as mumbo jumbo. But, particularly when it comes to short-term market movements, charting is pretty much the only game in town. The aim is to spot a trend and jump aboard, riding it for as long as possible. So, here's our analysis of where sterling is heading against the world's four other most important currencies.
Japanese Yen
Having hit a 17-year low against the pound, the yen has stormed back since last June. Its up-moves have been sharp and decisive, while its down-moves have been much shallower. Importantly, the pattern seems to be unfolding in five distinct 'waves'. According to Elliott Wave Theory – an arcane branch of technical analysis – this means the main direction of the yen versus the pound is now upwards, and we might expect further strong gains.
The exchange rate recently confirmed the switch from a long-term downtrend to a long-term uptrend by smashing upwards through its monthly Ichimoku cloud (shaded purple), a resistance zone formed by moving averages projected forwards in time. It has also surged above a falling trendline extending downwards from the all-time high at £0.0077429 in 1995.
If the uptrend continues - as seems likely - then we might expect the Yen to retest its recent high of £0.0060205 and perhaps ultimately £0.00718. By contrast, a drop back through the monthly cloud would be damaging to the Yen bull case.
Swiss Franc
The Swiss franc is a classic safe haven during times of anxiety and this high-quality currency has made steep gains since the credit crunch began in summer 2007. Applying the Elliott Wave Principle, the Swiss franc has traced out two upwards 'impulse' waves and two corrective waves, and has now embarked on the fifth and final wave of the current sequence.
This isn't to say that the franc's bull market will necessarily end any time soon. Fifth waves can often become 'extended', meaning that they travel a much greater distance and perhaps also over a much longer period of time than one might have expected. The Wave Principle suggests that the franc should rise above its March high of £0.5141 and that it could ultimately reach £0.5843.
In order to do so, it must first overcome that resistance from the March high at £0.5141. Thereafter, it will have to negotiate barriers at £0.5334 and £0.5489, before surmounting the all-time high at £0.5698. But the outlook for the Swiss franc would become much less positive below £0.48103.
US dollar
The US dollar is in vertical ascent against sterling, which is classic 'third wave' behaviour. According to the Elliott Wave Principle, the third wave is often the strongest and longest of the five waves that characterise a major bull or bear market. While the size of this latest burst has already met idealised third-wave targets, its incomplete structure suggests that this move has further to go.
The massive rally in September has taken the dollar into its monthly Ichimoku cloud, which presents a thick band of resistance between the present level and £0.6012. There are also lateral zones of resistance dating back to the 1992-2000 period, particularly around £0.59 and £0.63.
In the near term, a pull-back or some sideways action is likely, because the dollar is overbought on daily, weekly and monthly timeframes. Beyond this, though, further gains are very likely indeed, and as such it could prove a good opportunity to buy dollars and sell pounds.
Euro
After many months of trading sideways, the euro broke to new highs against sterling in September. However, it has since pulled back sharply, raising the risk that it has formed a major top. Support is close at hand from the 200-day exponential moving average around 77.66p and from the top of the weekly Ichimoku cloud at 76.8p.
Applying the Elliott Wave Principle, it is possible to interpret the euro as having traced out a five-wave advance against sterling. If this were the case, we might expect a drop towards 75.73p, 72p and 69.36p. Looking very long-term, it might well tumble all the way back down to 66p.
To reassert its bullish trend, the euro needs to rally back above its 21-week exponential moving average, which currently lies at 78.6p. If it can do that, another attack on 80p may be in the offing. For the moment, though, the risks are to the downside.
