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The Case for a GBP/USD Top

The Case for a GBP/USD Top

Boris Schlossberg, Technical Strategist

In the UK, the ongoing plight of the consumer is acting as a lasting drag on the economy, and any renewed risk selloff is likely to cause a break of the important 1.52 support level in GBPUSD.

It was a quiet night of consolidation in the currency market, with EURUSD showing good two-way flow around the 1.3050 level, while GBPUSD was mildly weaker after UK retail sales showed an expected contraction.

UK retail sales declined -0.7% in March, meeting the consensus forecast, as cold weather depressed sales of clothing and household goods. This was a sharp reversal from February, when sales rose 2.1%. On a quarter-over-quarter basis, sales were up by 0.4%, which was a marked improvement over Q4 of last year, when sales declined by -0.6%.

Still, the weak UK retail environment clearly indicates that consumers are suffering. As noted before, the fact that wage growth has been the weakest on record while inflation remains well above 2.5% means that purchasing power in the UK continues to erode. That means that the UK economy is likely to remain moribund for the foreseeable future, and GDP growth will continue to hover around zero for the next several quarters.

The GBPUSD sold off to 1.5220 in its initial reaction to the news but recovered to pre-news levels after a rebound in precious metals helped spark a small risk rally in morning London dealing. For now, the 1.5200 level continues to support the pair, but there is little fundamental evidence of any economic improvement in the UK, therefore, any selloff in risk could quickly push cable through 1.5200 as the day progresses.

Euro Steadies After Recent Meltdown

Meanwhile, EURUSD recovered some of its losses from Wednesday, a day that saw a 200-point slide after comments from European Central Bank (ECB) policymaker Jens Weidemann suggested the possibility of rate cut sometime in the near future.

Today, strong bond auctions in Spain and France that saw yields continuing to come down, as well as news that Portugal would adhere to the austerity agreements despite the court ruling to overturn those measures, all helped to contribute to a more positive tone in the European session.

3 US Data Points to Watch

In today’s North American session, the economic calendar carries weekly jobless claims, the Philly Fed index, and leading economic indicators. The most recent batch of data has shown a modest slowdown in activity with only the housing sector bucking that trend.

If the reports today show further deterioration, the selloff in risk may resume, but for now, today looks to be a consolidation day as markets absorb the volatility of the past 24 hours.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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