GBP/USD Ascending Channel Provides Profit Opportunity
The pound regained its footing after it was sunk in early trading as June’s public sector net borrowing report showed the budget shortfall narrowed by less-than-expected on the month. A drop in mortgage approvals also added to the bearish sentiment as it fueled concerns that growth could stall as the government increases efforts to reign in the budget. The outlook for corporate earnings and expectations that the European bank stress test will bank the sector in a positive light helped restore risk appetite, generating support for the GBP/USD. The greenback has itself been under pressure as the U.S. has its own deficit to tackle and is the pace of growth for its economy slow. Nevertheless, the reserve currency remains a safe haven currency and continues to see its fortunes tied to risk trends. The brighter shorter-term outlook points toward a continuation of the pair’s bullish channel, but a dimming outlook for global growth increases the chances of a bearish break.
Levels to Watch:
-Range Top: 1.5570 Trend, Pivot)
-Range Bottom: 1.5125 (Trend, SMA)
• Long: Place an entry at 1.5150
• Stop: Set the stop to 1.5050-100 pips in risk
• Target: The first target is 1.5300
Trading Tip – Today’s bounce from the 20-Day SMA at 1.5144 could signal that we may have missed the bullish set-up. The technical level has defined the lower bound of the channel adding to its credibility as a support barrier. Uncertainty over the stress tests could lead to a retracement of the GBP/USD’s recent gains. Additionally, there is U.K. event risk over the next few days with the releases of the BoE minutes, retail sales and GDP reports which could weigh on bullish sentiment providing the necessary price action to trigger our set-up. We will look for a positive reaction to the stress tests to generate the bullish conviction needed to ensure subsequent profits. However, if U\.K. fundamental data significantly disappoints then a bearish break can’t be ruled out.
Event Risk for U.K. and U.S.
U.K. –The release of the minutes from the MPC’s last meeting could improve the outlook for yields if there was a break of ranks with members voting for tightening to begin. Inflation remaining above the 3.0% 5hreshold for a fifth month has started to raise concerns and could lead to a split vote. The June retail sales report and the reading for second quarter GDP are forecasted to show sustained domestic demand and growth, potentially offsetting the anguish caused by the budget deficit, adding to a bullish pound case.
U.S. – Upcoming housing data is expected to add to the cloudy picture for the sector following today’s drop in housing starts and increase in building permits. Existing home sales are forecasted to have declined by 9.9% in June with demand for new construction forecasted to rise by 8.3%. The gauge of leading indicators is expected to add to a dimming outlook or the economy with forecast for a 0.3% decline. The most market moving release may be the U.S. consumer confidence report if the Conference Board’s gauge show a similar increase in pessimism to the University of Michigan survey, then we could see a broader flight to safety which should benefit the dollar.
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