The Cable's rally has finally topped out after the currency pair breached the highly psychological 1.60 level. Yesterday's pop on oversold conditions was extended today after Britain's CCC data printed a surprising decline. The improvement in unemployment led investors back to the Pound and the Sterling also logged solid gains against the Euro. The positive CCC number combined with last week's encouraging Services PMI data gives investors hope that the BoE may refrain from increasing its QE package. However, investors shouldn't forget yesterday's CPI number came in two basis points below expectations. The BoE's ultimate goal is to meet a desired 2% level of inflation while avoiding an embarrassing decline below 1%. Hence, there's little reason to believe that the BoE will make an effort to drain liquidity before prices show considerable signs of stabilization. In fact, previous BoE comments show the central bank is comfortable with a weaker Pound since it attracts foreign demand for British goods and services. Therefore, it is difficult for us to change our negative outlook for the Cable at this point in time. Additionally, the GBP/USD faces some challenging immediate-term technical barriers.
Technically speaking, the 1.60 area should serve as a hefty topside obstacle considering its historical prevalence. Furthermore, the Cable must face multiple downtrend lines along with previous October highs. Speaking of which, our 3rd tier downtrend line should play a key role since it runs through these October highs. A pop past our 3rd tier would likely spell the beginning of a new leg up for the currency pair. As for the downside, bulls should find comfort in the fact that the GBP/USD is trading back in September's range and 9/28 lows. Additionally, the Cable now has a few uptrend lines to fall back on before considering a retest of previous October lows. Hence, immediate-term losses could be limited.
Britain will be quiet on the data-front for the remainder of the week, leaving the currency pair's movements up to the performance of upcoming U.S econ data and Q3 earnings results. However, it's a bit difficult to determine how the GBP/USD will behave correlation-wise since the recent negative correlation with U.S. equities has flipped in the past 24 hours. Therefore, investors should refrain from relying upon the behavior of correlations and pay more attention to technicals until we analyze another couple sessions for confirmation. Overall, we maintain our negative outlook on the Cable trend-wise due to discouraging pricing data the BoE's continued dovish monetary stance.
Present Price: 1.5950
Resistances: 1.5969, 1.5990, 1.6024, 1.6044, 1.6071
Supports: 1.5930. 1.5899, 1.5862, 1.5840, 1.5812
Psychological: 1.60, 1.55, October highs