GBP/USD Comes Up Against Key Downside Hurdles Ahead of BoE

Talking Points:

- USD/JPY Halts Bullish Series as Risk Appetite Wanes Ahead of FOMC.

- GBP/USD Comes Up Against Key Downside Hurdles Ahead of BoE.

The near-term rebound in USD/JPY may continue to unravel as global benchmark equity indices struggle to hold their ground, and the adjustment in risk sentiment may generate range-bound conditions as market attention to turns to the slew of central bank meetings scheduled for the days ahead.

The recent shift in risk appetite may keep USD/JPY under pressureas market participants utilize the Japanese Yen as a funding-currency, with the pair back at risk of testing the April-low (108.13) as it fails to extend the series of higher highs & lows from the previous week. At the same time, the fresh updates coming out of the Federal Reserve may do little to prop up the greenbackas officials are likely to project a terminal fed funds rate close to 3.00%, and the dollar-yen exchange rate may extend the bearish trend carried over from late-2016 if the committee refrains from releasing a more detailed exit strategy.

USD/JPY Daily

Chart - Created Using Trading View

• After marking a false break at the start of May, USD/JPY continues to search for support, with the pair at risk revisiting the lows from earlier this year as it trades back within the downward trending channel from December; lack of momentum to test the topside hurdle around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) may spur a more meaningful test of the April-low (108.13), which coincides with the Fibonacci overlap around 108.30 (61.8% retracement) to 108.40 (100% expansion).
• Nevertheless, will keep a close eye on the Relative Strength Index (RSI) as it appears to be threatening the bearish formation from the previous month.

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GBP/USD remains under pressure following the U.K. election, with the pair at risk of facing further losses should the key data prints coming out of the region cast a weakened outlook for growth and inflation.

Even though the U.K. Consumer Price Index (CPI) is expected to hold steady at an annualized 2.7% in May, a downtick in Average Hourly Earnings accompanied by a 1.0% decline in Retail Sales are likely to weigh on Sterling as it encourages the Bank of England (BoE) to preserve the highly accommodative policy stance throughout 2017.With Monetary Policy Committee (MPC) member Kristen Forbes departing the central bank at the end of June, the majority may merely attempt to buy more time amid the growing uncertainty surrounding the fiscal outlook. In turn, the BoE’s June 15 interest rate decision may yield a limited market reaction amid expectations for another 7 to 1 split, with the near-term outlook for GBP/USD now tilted to the downside as it fails to preserve the monthly opening range.

GBP/USD Daily

Chart - Created Using Trading View

• The break of trendline support accompanied by the close below the 50-Day SMA (1.2805) keeps the downside targets on the radar, but GBP/USD may face range-bound conditions ahead of the slew of central bank rate decisions on tap for later this week as it struggles to push below the former-resistance zone around 1.2630 (38.2% expansion) to 1.2680 (50% retracement).
• The Fibonacci overlap around 1.2860 (61.8% retracement) to 1.2950 (23.6% expansion) should keep the pair capped over the near-term as it largely coincides with the monthly opening range, and a more bearish pattern may take shape in the second-half of the year especially as the Relative Strength Index (RSI) extends the downward trend carried over from May.
• Keep in mind GBP/USD is also coming up against the the 100-Day SMA (1.2619) and the 200-Day SMA (1.2583), with a break of the downside hurdles opening up the next region of interest around 1.2460 (61.8% expansion) to 1.2490 (38.2% retracement)followed by the 1.2370 (50% expansion) hurdle.

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• Retail trader data shows 65.7% of traders are net-long USD/JPY with the ratio of traders long to short at 1.91 to 1. In fact, traders have remained net-long since May 17 when USD/JPY traded near 113.298; price has moved 3.1% lower since then. The number of traders net-long is 15.1% higher than yesterday and 2.2% higher from last week, while the number of traders net-short is 2.5% higher than yesterday and 2.2% lower from last week.
• Retail trader data shows 54.8% of traders are net-long GBP/USD with the ratio of traders long to short at 1.21 to 1. The percentage of traders net-long is now its highest since April 02 when GBP/USD traded near 1.25493. The number of traders net-long is 13.9% higher than yesterday and 44.1% higher from last week, while the number of traders net-short is 14.9% lower than yesterday and 15.0% lower from last week.

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--- Written by David Song, Currency Analyst

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