Talking Points:
- Tomorrow brings Super Thursday from the Bank of England, which means we get a rate decision along with the Quarterly Inflation Report and the press conference with BoE Governor, Mr. Mark Carney.
- Retail traders are currently net short in GBP/USD via IG Client Sentiment, to a tune of 1.18-to-1.
- Are you looking to improve your trading approach? Check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.
If you’re looking for longer-term analysis on GBP or USD, click here for our Trading Forecasts.
GBP/USD Pulls Back From Post-Brexit Highs
It’s been a rough past week for the British Pound, as GBP/USD was surging into fresh highs just two weeks ago. While a large portion of that move was being driven by a really weak US Dollar, there was also a theme of strength showing in the Pound as markets were bracing for the prospect of more rate hikes this year. As inflation remains brisk in the UK, with the early stages of wage growth beginning to show, the thought is that the Bank of England will shift to a more-hawkish stance by the end of the year. This has helped to drive Sterling higher against a number of currencies, further reversing the back-breaking weakness that showed up in the wake of the Brexit referendum.
On the topic of Brexit recovery, price action in GBP/USD keeps on chugging. That high that printed a couple of weeks ago came-in right around the 78.6% Fibonacci retracement of the Brexit-move in the pair.
GBP/USD Daily Chart: Resistance Shows at 78.6% Retracement of the Brexit-Move
Chart prepared by James Stanley
On Monday, we looked at the 61.8% retracement of that same move for reversal plays of this near-term bearish momentum. That support play worked out beautifully as the pair rallied by 150 pips in the day after. But in the midst of that bullish move, another factor began to show, and that was lower-high resistance below the vaulted psychological level of 1.4000.
This leaves the pair in a rather unattractive stance as we approach what could be a really big driver tomorrow in the Bank of England’s Super Thursday.
GBP/USD Hourly: Lower-Lows, Highs as Price Approaches Fibonacci Support
Chart prepared by James Stanley
The Big Question Around the BoE
The big question around the Bank of England for tomorrow’s rate decision is just how hawkish the bank might be towards the rest of this year. With inflation remaining well-above the BoE’s target, it’s almost a foregone conclusion that this will need to be accounted for in tomorrow’s Quarterly inflation report. Markets have started to build-in expectations for the possibility of as many as two rate hikes this year, in May and November, each of which are Super Thursday events.
If the Bank of England does take a hawkish tone, it would be quite the twist. The BoE has continually offered a dovish outlook for the British economy, largely on the basis of Brexit, and this even happened in November when the bank hiked rates for the first time in ten years. We even opined on the dovish nature of that rate hike shortly after it happened. But up to this point, the doom and gloom that was forecast by the BoE around Brexit simply has yet to show up. What has shown up in a rather undeniable manner is inflation, so a secondary question here is just how hard the BoE might pivot into a hawkish stance, and the degree to which that happens will likely help to drive flows in the British Pound in the coming weeks.
Price Action Around GBP/USD For Tomorrow
We’re currently sitting at a big area of support, as we have both a Fibonacci level and a channel mid-line in close distance of each other, right around yesterday’s lows. This could be a difficult support level to buy ahead of tomorrow’s Super Thursday as we’ve already seen one solid reaction off of that level this week; but can it produce another?
GBP/USD Daily Chart: Confluent Support From Fibonacci, Channel Mid-Line
Chart prepared by James Stanley
For longer-term strategies
The longer-term bullish trend remains in-force, even despite the pullback that’s shown up over the past couple of weeks. Timing re-entry into that bullish trend is complicated by near-term bearish momentum, but if we do see support hold around the current area, the door remains open for topside exposure.
But – even if we do get a break of current support, there’s another area that may attract attention from buyers, and that’s the prior area of resistance that had come into play in September and then again around the turn of the New Year. This zone runs from the approximate 1.3589 up to the September high of 1.3658 and, as of yet, has not been tested for support. If we do see Sterling break-lower around BoE tomorrow, secondary support in this area can keep the door open for bullish strategies with stops set below the prior swing. This prior swing came-in at the 50% retracement of the move, just below the 1.3500 psychological level in the pair.
GBP/USD Daily Chart with Secondary Support From Prior Swing Highs
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on GBP/USD? Our DailyFX Forecasts for Q1 have a section specifically for GBP/USD. We also offer a plethora of resources on our GBP/USD page, and traders can stay up with near-term positioning via our IG Client Sentiment Indicator.
--- Written by James Stanley, Strategist for DailyFX.com
To receive James Stanley’s analysis directly via email, please SIGN UP HERE
Contact and follow James on Twitter: @JStanleyFX
