GBP/USD: Merely an oversold bounce?

<p>Things are looking decidedly better for risk assets today, and not just in a “Thank Goodness It’s Friday” kind of way. Starting with the world’s […]</p>

Things are looking decidedly better for risk assets today, and not just in a “Thank Goodness It’s Friday” kind of way. Starting with the world’s most important market of late, oil has built on yesterday’s gains and assuming the current gains hold, WTI is on track for back-to-back daily gains for the first time since before Christmas. As my colleague Fawad Razaqzada notes below, talk of a long-term bottom in oil prices is premature at this stage, but traders will take anything they can get after the relentless collapse to start the year.

The greater optimism about oil is spilling over into other major asset classes, with global equities trading higher across the board and “risk” currencies rallying at the expense of safe havens like the Japanese yen. Like oil, one currency pair that’s long overdue for a bounce is GBP/USD, which tagged a fresh post-Great Financial Crisis low beneath 1.4100 yesterday. The unit has since surged over 250 pips to trade back in the mid-1.4300s, prompting traders to wonder whether we’ve seen a significant bottom in cable.

In our view, the answer is much the same as with oil: the current bounce could certainly extend into next week, but it’s still premature to call a meaningful low in GBP/USD. Supporting the bullish GBP/USD case, the daily chart shows a clear Bullish Pin* / Bullish Engulfing ** Candle formed on Thursday, signaling a big shift from selling to buying pressure. In addition, both the MACD and the RSI indicators are turning higher from subdued levels, suggesting that the bearish momentum is starting to shift, at least for the moment.

That said, the medium-term (and even the slightly-less-immediate-term) picture is still very worrying for sterling bulls. Even just today (Friday) we saw a disappointing UK Retail Sales report, showing sales declined on a month-over-month basis in the critical December holiday shopping period, and the November Retail Sales report was also revised down as well. Meanwhile, the pair is far from making any sort of higher high on the daily chart, so we’re inclined to give the established downtrend the benefit of the doubt for now.

* A Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken.

**A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.

gbpusd1-22-2016 10-38-50 AM

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (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.

For further details see our full non-independent research disclaimer and quarterly summary.