Pound vs. U.S. Dollar: Mystery of Round Numbers

By Vadim Pokhlebkin


The exchange rate between the British pound and the U.S. dollar, known as "cable" among forex traders, is again inching closer to the even two-dollar mark. To most people, this means very little (unless you're an American traveling to the UK), but if you're a forex trader, this could be very important; for a forex trader, this news reads "opportunity."
The $2 level in cable is what they call a round number. Markets often act strangely at such junctures. Paradoxically, round numbers both attract and repel price action; in technical analysis lingo, round numbers will often serve as support and resistance levels.
A round number like 2.0000 in the GBP/USD is no exception, which is largely why cable has been bouncing in the $1.98 - $1.92 range since December 2006, unable to stage a real attack on the $2 level – yet not backing off too far, either. This slow build-up of power – like an army lining up troops along the border – is typical for a market faced with a psychological barrier of a round number.
The theory of round numbers says that while a market may be slow to break through the level, once it does, it covers the distance to the next round number very quickly. But that's in theory. In practice, when the Dow (round numbers work in many markets) first broke though 100 in January 1906, it soon crashed back below 100 (41.22, to be exact). It took 18 years before it blasted through 100 for good. The Dow first reached 1000 in January 1966. It took 17 years before it blasted though that level for real.
You know when the GBP/USD first broke through the $2 level? In September 1992 – fifteen years ago. Then it fell hard, and it's been working its way back up ever since. But even if it breaks through to the upside for the second time, it's not a guarantee that it will keep going higher, despite what the theory of round numbers may say.
Round numbers do not figure into the Elliott Wave Principle. However, you could try and combine the two methods. When your market has reached a round number, try and identify where prices are in the wave pattern – and you may have a better idea as to how fast it may break through (if at all), and whether or not the break will be sustained.
You don't have to be an Elliott wave expert to do that. Answer this one question, and you will be far ahead of the rest of the trading crowd: Is the larger Elliott wave structure of your market impulsive or corrective? If impulsive, you could see a break of the round number before long. If corrective, probably not.
What about present wave structure in cable, you ask? Well, our analysts think that, "the current setback from near 1.99 is corrective." Which means that it may be a little while before the pound gets going – despite the widespread expectations that the U.K.'s rising interest rates should keep the fire burning under the GBP/USD.