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GBP/USD’s Threat of Range Bottom, Trade Opportunity

GBP/USD’s Threat of Range Bottom, Trade Opportunity

2010-03-19 21:01:00
John Rivera, Currency Analyst
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0319rt1

How stable is the GBP/USD Range?
 Levels to Watch:
-Range Top:       1.5300 (Range, Pivot)
-Range Bottom: 1.4900 (Fibo, Range, Pivot)
• Dovish rhetoric from the BoE has weighed on the sterling and increased speculation that more quantitative easing is forthcoming. Meanwhile, the dollar continues to be a safe haven and the re-emergence of troubles in Greece has fueled greenback support. Risk trends will continue to be important for the pair, but U.K. monetary policy considerations are currently the main driver of price action.
• An argument can be made that the GBP/USD is in more of a rising channel, which would justify a long position at current levels. However, giving current momentum it would be like catching a falling knife. Therefore, we will wait for a test of the lower bound where we see solid support at 1.4870- the 61.8% Fibo of 1.3514-1.7046.
Suggested Strategy
• Long: Place an entry at 1.4850-just below Fibo support.
• Stop: Set the stop to 1.4770-just below the 3/1 low.
• Target: The first target is 1.5000-pschological resistance and approximately 1.5 times risk. Followed by 1.5258-3/19 high.
 

Trading Tip – The rising trend line must not be discounted as an opportunity could present itself before the presented set-up. However, we still favor a re-test of support at the 61.8% Fibo level. It would take a major bout of risk aversion or further action from the BoE to take the pair below the golden ratio. Markets are now hanging on the words of MPC member Andrew Sentence, who warned of a double dip recession. However, markets are overlooking his other remarks that “substantial financial tightening will be needed”, and that he is “relatively encouraged” by the turn around last year. The high level of volatility and sharp trends that we have seen in the market has led us to what may turn out to be a premature set-up. However, it is forward thinking that will help you take advantage of opportunities that may come sooner than expected.

Event Risk for U.K. and U.S.

U.K. – The upcoming consumer price report will present major event risk as a decline in inflation would validate the BoE’s contention that a return to their 2.0% target is ahead. Policy makers will be able to continue their stimulus efforts without the threat of price growth. Economists are forecasting CPI fell to 3.1% from 3.5% which is well above the central bank’s 2.0% target. Retail sales for February is also an important release as an increase in consumption would build upon the improvement in the labor market and raise the outlook for domestic growth.

U.S.– The existing home sales are expected to have fallen for a third straight month in February which could spark a flight to safety and dollar support. A rebound in the housing sector is seen as the key to a recovery and a negative trend will lower the outlook for growth. Conversely, U.S. Durable Goods orders are expected to improve for a third straight month as continued demand from abroad and an improvement in domestic consumption are pacing growth. The final GDP figures for the fourth quarter are expected to confirm the economy grew 5.9%, and prior data suggest that growth is sustainable then we could start to see dollar support on an improved outlook for interest rates.

0319rt2

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