British Pound Technical Forecast: Bearish
- It was a brutal week for the British Pound with a hastening in the sell-off around the Thursday Bank of England rate decision.
- That BoE rate decision was interesting. The bank warned of potential inflation of 10%+ in Q3, which could drive a ‘sharp economic downturn’ and that seemed to really take grip of global macro markets. Mr. Nick Cawley covered the fundamental aspect of the matter in his fundamental forecast, entitled ‘Sterling Has a Shocking Week.’
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
We’re fast nearing the point in a number of macro markets where technical events can soon become fundamental problems. When prices drop quickly and particularly when there’s leverage involved, things can start to break. And then, there’s new problems to incorporate on the fundamental side of the matter as typical market mechanics – stop being typical.
We’re not quite there on the British Pound yet but given the warnings from this week’s Bank of England rate decision, we might not be far off. A fast dropping GBP brings risk to the inflation forecast, particularly when important things like energy need to be imported. The falling GBP makes those imported items that much more expensive and then the economy is in that very unenviable spot where inflation is spiking, the currency is dropping and growth, well growth has to take a back seat as Central Banks quickly move into a defensive posture.
On the fundamental side of the matter, I refer you to my colleague Nick Cawley and his already-published fundamental forecast on the British Pound. He said it best in the title, with ‘Sterling Has a Shocking Week.’
On the technical side of the matter, this drop has been ongoing for a few weeks now…
GBP/USD
If we go back to April 20th, the pair was still grinding support at the 1.3000 big figure. I spent a good amount of time in a webinar the day prior looking at both sides of the setup. While there was bearish potential, there was also a possible bullish backdrop. Which would take hold was entirely based on how the 1.3000 level would be treated (begins at 36:15) in the webinar which is in the player on the linked page.
The breakdown began to hit on April 22, which was a Friday, as the 1.3000 big figure was taken out as a surging US Dollar dropped a number of major currency pairs to fresh lows. Since then sellers have remained aggressive. There was a bit of support building above the 1.2400 handle, and that held for about a week – until the Bank of England rate decision on Thursday, which gave bears another strong shot-in-the-arm. And the Friday following that rate decision brought some follow-through selling as another fresh yearly low came into play.
The fear here is just how oversold the move has become along with how quickly it’s priced in. There’s a spot of possible support around the 1.2250 psychological level that could slow the move, and combine this with the fact that the US Dollar is dealing with its own resistance, and there’s reason to exercise caution here. This could provide some stifling to the bearish move but, there may be more amenable pastures elsewhere which I’ll look at on the next chart.
For resistance – there’s a spot from 1.2450-1.2500 that remains of interest. There’s a Fibonacci level in that zone, along with a series of swing-lows as the market was trying to hold support before the BoE sent the currency flying lower.
GBP/USD Daily Price Chart
Chart prepared by James Stanley; GBPUSD on Tradingview
GBP/JPY
If we do see some continued risk aversion, there may be some greater bearish potential in GBP/JPY. The high-flying trend in the Yen has recently slowed a bit as the major USD/JPY has begun to engage with the 130.00 psychological level.
The item of interest in GBP/JPY this week was a continued build of resistance from around 163.20 up to around 164.20. From the daily chart below, you can see where this zone had seller reaction at this zone for six consecutive days leading into that BoE rate decision. On Thursday, as GBP weakness began to take-over, a sell-off began to show and prices pushed down towards the 160.00 psychological level. That low has since held, but with this recent fundamental shift, there may be some greater potential here, particularly if sellers can push down below the 159.48 swing low.
GBP/JPY Daily Price Chart
Chart prepared by James Stanley; GBPJPY on Tradingview
EUR/GBP
EUR/GBP could be of interest for those looking to fade this GBP-weakness, but the setup on the chart requires some attention for such matters.
The pair has been in a broadening pattern for more than a year now as the range has been widening; but there’s been a generally bearish bias for much of this time. This week’s sell-off in the Pound has helped the pair to run up for a test of seven-month highs. That level has so far held bulls at bay; and there’s a Fibonacci level of interest that’s helping to hold support at .8521.
If bears are able to push below the .8500 psychological level next week, the door can begin to open into reversals. But – if that high just inside of the .8600 handle is taken-out, the topside breakout activates, and that’s a breakout that could be interesting given the context of the past year. Broadening patterns highlight the potential for volatility to continue expand so, this is an area that traders would probably want to be really cautious of getting caught on the wrong side of a surging breakout, in either direction.
EUR/GBP Daily Price Chart
Chart prepared by James Stanley; EURGBP on Tradingview
--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
