CHARTING EUROPE: Sterling Index Has Limited Scope To Recover

-- Bear failure at 77.5 underpins current bull wave
-- Corrective gains expected to reach 86.2 at least
-- Upside unlikely to extend beyond 88.8


LONDON (Dow Jones)--Prospects have improved somewhat for sterling in the foreign exchange markets.

The Bank of England's sterling effective exchange rate index has scope for a recovery to 86.2, although there is extended upside risk to 88.8 before the three-year corrective rally from the January 2009 reaction low at 73.4 is likely to peak.

The July 2011 reaction low at 77.5 is on the verge of becoming a significant bear failure, as lower highs at 82.3 and 83.1 come within striking distance.

At the time the July 2011 low at 77.5 was met, a 30-month bear pennant continuation pattern had been completed. But the subsequent failure to fall further is behind the current wave of sterling strength.

GBP bulls need to meet a minimum upside requirement target at 84.2, and then launch a fresh wave of pressure to the June/August 2009 reaction highs at 84.7.

For details, see the sterling effective exchange rate index monthly chart below:

http://www.dowjoneswebservices.com/chart/view/5834

A push above 84.7 would attract additional gains to 86.2, the 38.2% Fibonacci retracement level of the dominant 106.9/73.4 decline that took place between January 2007 and January 2009.

The area between 86.2 and 88.8 is likely to be the location for a significant peak.

The 88.8 target is a wave equality target projected from the 77.5 low. But equality for this current bull wave is not expected to be met, as a bear wedge formation takes shape.

Only a setback below 79.6 would create downside risk back to the July 2011 reaction low at 77.5.

The sterling effective exchange rate index closed Wednesday's session at 81.1.