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GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

2017-03-22 17:00:00
James Stanley, Currency Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Long-term: range-bound; short-term: bullish.
  • Dollar-weakness after the FOMC rate hike last week started the bullish trend in Cable – but it was this week’s UK inflation print that’s extended the move with the potential for more near-term up-side.
  • If you’re looking for trading ideas, check out our Trading Guides. They’re free and updated for Q1, 2017. If you’re looking for ideas more short-term in nature, please check out our Speculative Sentiment Index Indicator (SSI).

In our last article, we looked at the multi-month range in GBP/USD while price action was sitting very near support ahead of some key event risk. On the immediate horizon was the Federal Reserve’s well-telegraphed rate hike, another Bank of England rate decision in which little was actually expected, and yet another example of higher-than-expected inflation out of the U.K. We discussed these fundamental themes in-depth in last week’s Fundamental Forecast for the British Pound.

The net result for all three of these drivers was a stronger spot price in Cable. The Federal Reserve rate hike produced Dollar-weakness as the Fed inserted a heavy dose of caution and dovishness along with that move. The Bank of England rate decision saw the first vote within the MPC for an actual rate hike, as Kristin Forbes dissented against keeping rates pegged to the floor; and then the meeting minutes indicated that Ms. Forbes may not be alone in her dissenting at future rate decisions.

GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

Chart prepared by James Stanley

The big driver here is that potential for higher-than-expected inflation. After the ‘sharp repricing’ in the value of the British Pound around Brexit and then the ensuing dovish campaign from the Bank of England, the prospect of rising inflation seemed arithmetic. When a currency falls by 20% in value in a very short span of time, companies importing into that economy are going to take notice. And they’ll likely adjust prices-higher to account for the weakened exchange rate because they don’t want to see their profit margins disintegrate.

So, ever since the ‘flash crash’ in early-October, that’s been the prerogative in Cable: Looking for higher rates of inflation in order to read when the BoE may a) step away from emergency-like accommodation and, eventually b) start looking at potential rate hikes to stem rising inflationary forces.

On Tuesday of this week we got the most recent data point for UK inflation, and this is data for the month of February. Inflation came-in at an annualized rate of 2.3%. This is well-above the BoE’s target of 2%, the expectation for inflation during February to have been 2.1%; and heavily above the print in January of 1.8%. Trades have rushed to close up prior short-positions as price action in Cable has squeezed higher; with current resistance showing off-of the 1.2500 psychological level.

This carries the potential for bullish-continuation. The likely determinant for just how much continuation is probably going to come from how deep this run of USD-weakness may last. For those looking at longer-term setups, the range in Cable still persists and this should denominate approaches until the range breaks; in one direction or the other. If this recent bout of strength can pose a test beyond resistance, we may have the possibility of a bullish trend developing in GBP/USD. But this would likely need to be coupled with a strong break-lower in the Greenback, which can be difficult to surmise in an environment in which we just got a rate hike a week ago.

GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

Chart prepared by James Stanley

For those that are looking to press near-term strategies, the current zone of resistance at 1.2500 could be a big ‘tell’ level. If bulls are able to drive prices above this level, there’s another potential area of resistance at 1.2552. This could be an ideal area to look for secondary resistance; at which point 1.2500 could be re-assigned as support in the effort of catching a higher-low on the near-term Cable chart:

GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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