The Cable pulled a rally out of left field yesterday and exploded for nearly 400 basis points since our previous commentary. The psychological 1.60 level ended up having a marginal impact and has been left in the dust. Once the Cable got above our previous 3rd tier uptrend line, now our 1st tier, the currency pair took off as the S&P futures rallied towards 1100. The GBP/USD's surge comes with little data besides a decline in the CCC. In fact, CPI came in weaker than expected this week and could be a cause for concern for the BoE unless they expect prices to rise with an improvement in unemployment. We attribute the Pound's breakout to a massive short squeeze and somewhat encouraging earnings from financials. Financial services comprise a large portion of Britain's GDP, so an improvement in earnings bodes well for Britain's overall economy and causes investors to speculate a pause in BoE QE. Either way, the evidence behind the Pound's surge is inconclusive and the Sterling's breakout caught us by surprise. We don't like to be party crashers, but we're not entirely sold on the longevity of the Cable's new uptrend. However, the Cable's breakout does give us another glimpse of the future when all central banks start to tighten liquidity. For the time being, we will need further confirmation fundamentally, technically, and psychologically.
Psychologically speaking, investors will receive a stream of public address from central bank heads to kick off next week, including Bernanke on Monday and King on Tuesday. We've seen how large of an impact King's comments can have on the Pound, so we expect volatility to remain at a heightened state. On a cautionary note, it's unknown how Governor King will address this week's breakout in the Pound. If he were to alter his dovish monetary stance, then the GBP/USD's near-term gains could really accelerate. However, we believe King will try to keep investors in check and tame gains in the Pound in order to keep British goods and services attractively priced for exportation. British econ data will be scattered throughout the week, yet fundamental focus will likely square on China's important data flow on Wednesday. China has been at the forefront of the global economic recovery, so investors will be paying particularly close attention to China's GDP and Industrial Production figures late Wednesday EST.
In terms of technicals, the Cable has a few medium-term barriers to overcome in order to make believers out of us. These include our new 4th tier downtrend trend line, the psychological 1.65 level, and 9/11 highs. Our 4th tier seems to be the most important of the three since a failure would imply a retest of September highs since it runs through 9/11. As for the downside, the Cable has clearly created a new comfort zone over the past 24 hours. The currency pair now has multiple uptrend lines, 9/21 lows, and the psychological 1.60 level working in its favor. Therefore, the Cable has placed itself in an opportune position to breakout into a more lasting uptrend should psychological and fundamentals fall into line.
Present Price: 1.6340
Resistances: 1.6342, 1.6372, 1.6395, 1.6413, 1.6446, 1.6470
Supports: 1.6305. 1.6271, 1.6246, 1.6205, 1.6167, 1.6130
Psychological: 1.65, 1.60, September highs