The pound's weakness over the last four weeks has come as a result of heightened expectations for more quantitative easing, as well as the pressures facing the European continent - one of the UK's key trading partners.
We saw both themes hit on in today's news and developments as we had one of the central bankers from the Bank of England saying that he would revisit the case for more QE when the central bank meets next month. We also had George Osborne Chancellor of the Exchequer reiterating the need to hold steadfast to austerity measures and the dangers of European leaders not acting in a unified voice that sends a clear message to markets.
However with the GBP/USD now falling from around 1.66 in the middle of August to 1.57 in this week's trading we want to ask the question if perhaps a short-term correction is due for the Pound. In the 4-hour timeframe the GBP/USD has been in oversold territory for the better part of two weeks but momentum - as measured by the RSI - has been able the climb above the 40 level recently. Can the failed attempts to move below 1.57 mean that we have a short-term bottom in place? It's always tricky to try and pick bottoms and while we may be able to get a better risk-to-reward ration by trying to anticipate a corrective rally, its a counter-trend play. We have had a very strong trend in place as the pair has been unable to move above the 21-ema in this timeframe over the last 4 weeks. Still, we may be trying to do just that currently.
If we can manage to see the pair rally, the first level of resistance comes in at the 1.5922 level which would be a 23.6% retracement of the recent fall. Any gains above here would open up the 55-daily EMA at 1.6045 (which would be the near the 200-ema in this timeframe). On the downside, we would want to place a stop somewhere below this week's lows.
The scope for a corrective GBP/USD bounce is there, but we would need some more confirming signals to make this scenario more realistic. The longer-term risk are still pointed to the downside, but in the short term the downmove may be overdone, or at least much of the anticipation around QE should be priced into the market. The scope for any sterling recovery would be based on the fact that short-term risks are mainly situated in the euro zone and the US.
Chief Market Analyst