GBP/USD drops to key support before bounce
James Chen February 17, 2016 9:21 PM
<p>GBP/USD continued its fall early on Wednesday to hit a major support area around the 1.4250 level, before bouncing. This drop modestly extended the currency […]</p>
GBP/USD continued its fall early on Wednesday to hit a major support area around the 1.4250 level, before bouncing. This drop modestly extended the currency pair’s substantial retreat this week from its 50-day moving average and the 1.4500 level.
In the process, this retreat has erased much of the gains made during the upside pullback of late January and early February, and could be the precursor to a continuation of the longstanding bearish trend.
Though the minutes of January’s Federal Open Market Committee (FOMC) meeting, which are scheduled to be released on Wednesday afternoon, may provide some additional clarity as to the Federal Reserve’s monetary policy stance last month, financial and economic events since that meeting have weighed on the likelihood of a further rate hike in the near-term. Diminished expectations of such a rate hike have pressured the US dollar from the beginning of February, though the greenback has rebounded since late last week.
Perhaps even more vital to GBP/USD’s outlook than the dollar’s frequent gyrations due to Fed expectations, however, may be the persistently weakened state of the British pound. This weakness stems from an increasingly dovish Bank of England that was previously expected to begin its own monetary tightening cycle at some point following the initiation of the Fed’s rate hike in December. These expectations have since diminished dramatically, and even reversed to accommodate the potential for a rate cut, given recent concerns over weak economic growth, financial market instability, and low inflation.
As long as the Bank of England maintains a monetary policy stance that is consistently seen as even more dovish than the Fed’s, the underlying bearish trend for GBP/USD should continue. Despite the noted upside pullback in late January and early February, price action since then has leaned towards a potential resumption of the entrenched downtrend. With any sustained breakdown below 1.4250 support, the next major downside target remains at the 1.4000 psychological support objective, followed further to the downside by the 1.3600 support level, last touched in early 2009.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.