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GBP/USD Channel Waits For Growth Signs

GBP/USD Channel Waits For Growth Signs

2010-05-24 21:20:00
John Rivera, Currency Analyst
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 RT-10-05-24-01

How stable is the GBP/USD Range?

Levels to Watch:
-Range Top: 1.5600 (Trend, Pivot)
-Range Bottom: 1.4235 (Trend, Pivot)

• The pound has been directionless as markets await details on the course of action from the new government. The sterling was being weighed by the broader flight to safety on concerns over the impact on the European debt crisis. The pound has since regained its footing on diminishing fears, which could shift the focus to domestic fundamentals. The new coalition between Conservatives and Lib Dems announced the outline for 6.25 billion pounds in budget cuts which helped generated sterling support keeping the current channel; intact. However, will these measures be enough to restore confidence in the indebted nation?

• The GBP/USD finds itself in a declining channel with the lower bound defined by (7/22,10/12,3/1,and 5/20 lows). The upper bound is not as valid with only two peaks the 11/17 and 1/19 high. Short-term price action has settled into a range between 1.4250-1.4500 and a break from this formation must precede any extended move.

Suggested Strategy
• Long: Place an entry at 1.4550 above current short-term range
• Stop: Set the stop to 1.4450-100 pips in profit
• Target: The first target is the 20-Day SMA at 1.4825

Trading Tip – A strong support trend line give us confidence in our set-up but we must still take into account the possibility that a broader flight to safety could re-emerge if the issues in Europe show signs of spreading. Markets remain sensitive to news from the region, evidenced by Spain’s bank rescue generating considerable volatility to start the week. Despite broader trends the GBP/USD has settled into a range between 1.4250-1.4500 and until we see a break from this formation expect price action to continue sideways. However, a move above or below could lead to an extended move and that is why we have set-up just above the upper bound. Although there is considerable downside risks, we are favoring a move to the upside giving the sharpness of the bearish rally and the potential for the new government to generate a period of optimism for the U.K.

Event Risk for U.K. & U.S.

U.K. – Economists are forecasting that the economy grew by 0.3% in the first quarter up from the initial reading of 0.2%. However, expectations are that experts were flat for the period down from 3.8%. Signs that the current recovery is stronger than expected would help make the case that the economy could withstand the pending cuts in government spending. However, if demand from abroad is fading then growth would be dependent on consumer consumption given the government restraint. Therefore, the BBA loans for home purchase and consumer confidence readings will take on added importance as an improving housing market and sentiment could led to stronger spending from Britons.  

U.S. The economic calendar is expected to point toward a sustaining U.S. economic recovery with home prices, consumer confidence and durable goods orders all expected to improve. If the housing market continues to show signs of stabilizing post tax credit, then we could see the outlook for growth and interest rates rise. Economists are forecasting a 1.5% increase in durable goods orders, another sign of continued growth. However, unless we see improvement in the labor market the FOMC is expected to remain on hold which may lead to markets overlooking this week’s release in anticipation for the NFP report.

RT-10-05-24-02

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