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A Surprising New Corrective Phase for GBP/USD

A Surprising New Corrective Phase for GBP/USD

2014-02-04 21:52:00
Liam McMahon, Head Forex Trading Instructor

Talking Points:

  • Changing UK Monetary Policies
  • Break of Rising Wedge Pattern
  • Major GBP/USD Resistance Level to Watch

Strong UK economic data and a relatively hawkish Bank of England (BoE) have fueled expectations for rising interest rates. Those expectations have been tempered recently, however, thanks to comments from BoE Governor Mark Carney. Part of the reason we’ve seen such a rally in the British pound (GBP) of late is because of very strong UK employment figures, which have pushed the unemployment rate down near the Bank of England’s 7% threshold.

According to Carney, this threshold is likely to be crossed “materially earlier than we (the Bank of England) had expected,” and as a result, the BoE is going to have to overhaul its forward guidance a bit.

Carney has said the UK economy isn’t yet ready to grow without stimulus, and so a rate hike anytime soon remains very unlikely. The Bank of England has noted that inflationary pressure remains low, and we may see the Bank add an inflation requirement to their forward guidance sometime this month.

The important thing to draw from this is that a rate hike in the UK remains far away, and it seems very possible that markets have gotten ahead of themselves in bidding up the GBP as much as they have. The recent ascending wedge break in GBPUSD may also be signaling the beginning of a corrective phase for the pair, one that sees some of the fundamental support fade a bit, causing prices to fade as well.

GBP/USD: The Case for a Correction

A_Surprising_New_Corrective_Phase_for_GBPUSD_body_GBPUSDDailyChart.png, A Surprising New Corrective Phase for GBP/USD

Ascending wedges are reversal patterns, and yesterday’s break was quite emphatic. At this point, GBPUSD traders should watch 1.64 for major resistance going forward.

By Liam McMahon, Currency Strategist,

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