GBP/USD set to break key level amid improving UK data
Fawad Razaqzada May 17, 2017 1:29 PM
Economic data out of the UK released in the last couple of days has been pound-positive, yet the GBP/USD is still holding below the 1.30 handle. But for how long? Given that the positively-correlating EUR/USD pair has already broken well above its own corresponding psychological hurdle at 1.10 after a sharp rally, the cable could be playing catch up.
Economic data out of the UK released in the last couple of days has been pound-positive, yet the GBP/USD is still holding below the 1.30 handle. But for how long? Given that the positively-correlating EUR/USD pair has already broken well above its own corresponding psychological hurdle at 1.10 after a sharp rally, the cable could be playing catch up. What’s more, the EUR/GBP cross has now hit resistance around its 200-day moving average (0.86 area). If the cross now heads lower again then we may see the GBP/USD start to outperform the EUR/USD. Of course, ‘outperform’ also means that both pairs could fall, but the cable at a slower pace. However, price action looks bullish and with the dollar weakening across the board, if the GBP/USD were to go higher, it would be now. Granted, not many speculators would be looking to hold any bold positions heading into the upcoming UK elections next month. But that is still four weeks away and so there’s plenty of time for things to change.
This week we have found out that:
- The Consumer Price Index (CPI) measure of inflation has hit its highest level since September 2013, rising to 2.7% from 2.3%.
- Core CPI has risen to 2.4%, above 2.2% expected and significantly higher than 1.8% the previous month
- Retail Price Index (RPI) has risen to 3.5%, up sharply from 3.1% previously.
- PPI Output prices have risen a further 0.4% month-over-month, suggesting producers are passing on rising import costs due to a weak currency to the consumers.
- Average Earnings Index in the three months to March rose to 2.4% compared to a year-ago period. This was up from 2.3% previously.
- UK jobs created in 3 months to March jumped to 122k vs. 21k expected
- The rate of unemployment has fallen to its lowest since 1975 at 4.6%, from 4.7% previously.
You get the picture: more jobs are being created, the unemployment is falling and wages are rising. But the weaker currency has helped to cause inflation to rise more than wages. So, real incomes have fallen. But everything else suggests that inflation could rise further – not least due to renewed rises in the price of oil with the OPEC looking set to agree an extension to its deal with some non-OPEC members in order to help reduce the supply glut and support crude prices.
So, the Bank of England may have to start tightening its monetary policy sooner rather than later in order to avoid inflation getting out of hand, even if it thinks that the rise in prices are temporary. This could keep the pound underpinned, despite the ongoing Brexit uncertainty.
The GBP/USD has now spent about 4 weeks in a relatively tight consolidation. But this is considered a bullish consolidation because it has allowed the Relative Strength Index (RSI), which is a measure of momentum, to unwind from ‘overbought’ levels through time rather than price. The RSI had moved to ‘overbought’ levels because of the rally in price since mid-March. Given that there has been very little retracement after that rally, it suggests that it is the buyers who remain in control of the trend. The sellers, sensing this strength, may move away, and the liquidation of their positions alone could be enough to cause another upsurge in the GBP/USD, which could potentially happen as early as today.
If the key 1.30 handle breaks decisively then there is nothing significant in terms of prior reference points until around the 1.3335-45 area. So, there is a possibility for a sharp rally if and when 1.30 breaks. However, this bullish technical outlook would become invalid if we see a failure at or around 1.30, accompanied by a reversal-looking candlestick price pattern on the daily chart. But if these conditions are not met, then any retracement could be short-lived, as after all the trend is now objectively bullish with the moving averages having moved in a periodic order: 21 above 50 above 200. What’s more, broken resistance levels such as 1.2775, 1.2850 and 1.2900 have all turned into support.
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