Forex Technical Update

The inflation concern of the BoE was highlighted in the latest BoE Inflation Report. With CPI inflation above 2%, there is less a prospect of increasing stimulus, or QE, and a higher chance of a rate hike getting closer. The decline seen in the GBP/USD ahead of the report was rejected from going below 1.62.

GBP/USD 8/10/2011 1H cHart
- The 1H chart shows that during the release of the BoE Inflation Report, a doji appeared. With the tail mainly pointing south, it reflects a rejection from below 1.62 (low was 1.6190), although the lack of a strong bullish candle suggests indecision heading into the US session.
- This rejection brings the GBP/USD back in consolidation. In a ranging market, we tend to pullback towards the mean (200sMA, or 50% retracement), near 1.6325-1.6340. Only a break above 1.6360 confirms bullish intent towards the range highs starting 1.6450.
- 1.6546 is the next pivot above the range highs.
- Also, the bullish scenario should be accompanied by the RSI rising above 60, and preferably above 70 if we are to test and possibly crack the range highs.
- In the 4H chart, the RSI should break above 60 to confirm that bullish momentum is maintained after a consolidation period.
- This rejection from going below 1.62 also  sets up an important support zone here. A break below this suggests that the bears do not fear inflation, and want to push the sterling lower against the greenback.
- The 4H chart shows that we are currently in a corrective state against the previous 5-wave rally representing a possible leading triangle.
- A push below 1.6190 can lead to a deep correction down towards 1.6127, 50% retracement, or 1.6045, 61.8% retracement.
GBP/USD 8/10/2011 4H Chart

Are you convinced that the BoE won't be messing with QE? Does this give fire under GBP/USD as the US does not have this inflation worry?
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Fan Yang CMT
Chief Technical Strategist