Falling Ethanol, Diverging Oil, and the pound getting pounded...Maybe?

I am going to make this a brief analysis and looking at 3 correlations occurring right now. Starting with Ethanol, Ethanol is a corn based fuel that acts as a direct substitute for oil based products. Looking at the December 2007 CBOT Ethanol Futures, there are two things to note. First note, a high point in March/April time frame and second, a consistent downtrend to today.

If the demand is decreasing for the primary substitute for oil, this causes me to believe the demand in general has been falling recently for oil. What has oil been doing in the time from March until now? Climbing, surprisingly enough.

Oil has climbed up and hit record highs over the past couple of weeks. If you look at the price at the pump, at least here, retail gas has not increased while oil has climbed up approximately 26% or climbed from $65 to $82.50 a barrel. Retail prices should have increased by about the same or higher. Why hasn't it? No increased demand while price is rising. This is a divergence in the inter-market analysis.

As seen in this image, both the CCI and the RSI (differing times) are diverging from the price. In most cases the price snaps back in line with the indicator, if this is one of those times, I would expect oil to fall.

The pound has not really benefited as of late on such a significant move on oil. Why? Possibly the concern of the housing market, slowing global economy, maybe the fact that the price is going up but demand is not means less purchases from British Petroleum.

Now what does that have to do with anything going on right now? This week we are going to hear the Bank of England rate decision. If I my assumption of slowing demand and increasing price is correct, the lower than expected trade balance we saw 3 weeks ago from Britain would be correct. If the GDP is slow, PPI has been low and housing is still struggling than the economy is not growing enough to be concerned about inflation. Sound familiar? It should, this is not far off from what the FOMC was looking at, slowing economy, inflation not as much of a concern as housing and BLAMMO, a rate cut.

I don't expect a rate cut from the B of E, but I wouldn't be surprised if they became very dovish in the comments which could weaken the pair near a resistance level. Look for a short oportunity, not necessarily against the USD but maybe against the AUD or the EUR or the CAD or anything that has shown recent strength. You have between now and Wednesday night (US Wednesday Night) to find a good risk position...

...or what about an option on the BPX?