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Short GBP/USD on Sustained Break Below 38.2 Fibo, 50-DMA

By , Currency Strategist
14 November 2011 21:45 GMT

The British Pound hasn’t been as closely tied to broad risk trends as say, the Australian Dollar or the Euro, but the Sterling has certainly been range bound the past few months. The GBP/USD recently failed to breakout above its Range Top and descending trend line that has been in place for the better part of the last four months, suggesting that it is indeed a key level that will hold, on a technical basis, for the time being. As such, with the technical view aligning with my medium-term fundamental outlook for the GBP/USD – a weaker Sterling due to the deteriorating British economy and a broad flight to safety into the U.S. Dollar – the pair appears poised to make a move back towards its Range Bottom over the next several days and weeks.

Levels to Watch:

- October High: 1.6165 (0.0 Fibo)

- Range Top: 1.6050/75

- October Low: 1.5270 (100.0 Fibo)

- Range Bottom: 1.5000/25

GBP/USD Daily Chart: July 2011 to Present

Short_GBPUSD_on_Sustained_Break_Below_382_Fibo_50-DMA_body_Picture_1.png, Short GBP/USD on Sustained Break Below 38.2 Fibo, 50-DMA

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The chart above illustrates the approximate 1000-pip descending channel that has been in place since mid-July. The most recent test of the Range Top occurred on Friday, after three other tests since the last week of October. The Sterling’s inability to find technical momentum to close above said level coupled with the deteriorating British economy and immediate concerns over the Euro-zone debt crisis are near-term impediments to the GBP/USD from climbing higher.

GBP/USD 6-hour Chart: September 22 to Present

Short_GBPUSD_on_Sustained_Break_Below_382_Fibo_50-DMA_body_Picture_4.png, Short GBP/USD on Sustained Break Below 38.2 Fibo, 50-DMA

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The chart above (6-hour timeframe) shows the Fibonacci retracement levels for the GBP/USD, and what is expected out of the GBP/USD in the coming weeks, with our bias in favor of U.S. Dollar strength and British Pound weakness. The pair currently trades between its 23.6 and 38.2 Fibonacci retracement levels, from 1.5954 to 1.5823, respectively, from the October 6 low at 1.5270 to the October 31 high at 1.6165.

Suggested Strategy

  • Entry:Short at 1.5750 [Below 38.2 Fibo, 50-DMA]
  • Stop: 1.6050 [Range Top] (300-pips)
  • Target 1 (Reward/Risk Ratio): 1.5612 [61.8 Fibo] (138/300, 0.46)
  • Target 2: 1.5482 [23.6 Fibo] (268/300, 0.89)
  • Target 3: 1.5270 [100.0 Fibo] (480/300, 1.60)
  • Target 4: 1.5000 [Range Bottom] (750/300, 2.50)
  • Timeframe: 2-weeks

Trading Tip Even on its most recent advance higher, the GBP/USD was unable to reach overbought territory on the daily chart, a sign that the medium-term trend to the downside remains in place. Likewise, on the 6-hour chart, the RSI was unable to close above the 60 level. In a bear market, the 60 level often serves as resistance and a sign that the trend will be held or change: in this case, the downside trend held as well. At 49, the daily RSI has significant room to work before hitting oversold territory, and the other technical indicators this report follows suggests a similar outcome. The daily MACD diverged bearishly today, with the differential at -11.6; the fundamentals support this divergence widening. On a similar note, on November 9, the Slow Stochastic oscillator issued a sell signal, and continues to point towards further losses, with the %K less than the %D, at 35 and 44, respectively.

Event Risk for the United Kingdom and the United States

The most important events on the docket come tomorrow, which arguably has the densest composition of market moving events on the week. Inflation data for the United Kingdom is due, which shouldn’t move markets that much considering the Bank of England has indicated it will maintain a loose monetary policy for the foreseeable future. The most important event affecting the pair directly would be retail sales data out of the United States.

United Kingdom – It’s clear that the continued period of low interest rates employed by the Bank of England has allowed inflationary pressures to move in on the British economy, with the consumer price index forecasted to show price pressures at 5.1 percent in October.This comes after the inflation rate jumped to 5.2 percent in September, its highest rate in three years. The Bank of England is ready to sacrifice purchasing power for economic growth, as evidenced by the Monetary Policy Committee’s decision to leave the key interest rate on hold at 0.50 percent at their most recent meeting, so the 5.1 percent rate for October is reasonable.The British Pound is unlikely to find sustained bids on the higher rate of inflation as interest rate expectations are completely depressed.

United States – Consumer demand is expected to have taperedin October, as a Bloomberg News survey shows that the median estimate for advance retail salescomes in at 0.3 percent, slightly worse than the 1.1 percent print in September. The September reading was the strongest print since February, when retail sales surged by 1.3 percent. Given the forecast for October, the print for September appears to be a bit of a fluke. Consumer demand is the most important component for U.S. growth, as it comprises nearly 70 percent of the aggregate GDP figure. That being said, the advance retail sales figure is the most important data release for the United States this coming week.

Data for November 13 to November 18

Data for November 13 to November 18

Date

United Kingdom Economic Data

Date

United States Economic Data

Nov 15

Consumer Price Index (YOY) (Oct)

Nov 15

Advance Retail Sales (OCT)

Nov 16

Jobless Claims Change (OCT)

Nov 15

Producer Price Index (YOY) (OCT)

Nov 16

ILO Unemployment Rate (3M) (SEP)

Nov 16

Consumer Price Index (YOY) (OCT)

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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14 November 2011 21:45 GMT