GBP/USD shrugs off weak UK GDP… at its peril?

The pound's initial reaction to the data was understandably negative, but surprisingly the currency quickly bounced back and hit a fresh high against the US dollar. It remains to be seen however whether the cable will be able to hold onto its gains ahead of and after the US GDP report, which comes out in the afternoon. But at the time of this writing, the cable was near the day’s high around 1.2950.

The GBP/USD was the obvious choice for traders today ahead of growth figures from both sides of the pond. The cable started the day firm even though economists' expectations were downbeat about the UK growth prospects. Indeed, GDP actually came out weaker than expected at +0.3% quarter-over-quarter and 2.1% year-over-year. Growth was held back by the dominant services sector where output rose just 0.3%, the weakest performance since Q1 2015. The pound's initial reaction to the data was understandably negative, but surprisingly the currency quickly bounced back and hit a fresh high against the US dollar. It remains to be seen however whether the cable will be able to hold onto its gains ahead of and after the US GDP report, which comes out in the afternoon. But at the time of this writing, the cable was near the day’s high around 1.2950.

To be fair, today's weak growth from the UK figures were hardly surprising. After all, most of leading economic indicators had been weaker throughout Q1 as households and businesses prepared for the start of the Brexit process. Brexit-related concerns may undermine confidence in the coming quarters, which could ultimately weigh on growth. Indeed, house prices have already started to ease back as landlords worry about the prospects of weaker demand due to a fall in net immigration as a result of Brexit.

Consequently, the pound's bullish days could be numbered, especially against currencies where the central bank is more hawkish than the Bank of England. With the Fed still on course to raise rates further this year, the GBP/USD’s current rally does look suspicious to me. However, you can’t argue with the market regardless of my fundamental views. I will therefore put my bearish views on the back burner until price shows a clear reversal sign. But I do feel we are nearing the turning point.

In the afternoon, the focus will turn to the US and we will find out how the world's largest economy fared in Q1. Analyst expectations suggest growth had moderated to 1.3% in Q1 on an annualised format. If correct, this would represent a noticeable slowdown from Q4, when the economy had grown 2.1% per cent. In the event the US economy fared better than expectations then we may see a comeback by the dollar in the afternoon.

Meanwhile from a technical perspective, there is no argument about who is in control of the current trend. The bears will need to remain patient with the cable having recently broken out of its long-term consolidation range to the upside. So, until and unless we see a distinct reversal price pattern and/or a key support level gives way, the path of least resistance remains to the upside. There are several levels of support to keep an eye on now, starting at 1.2900/20 area, followed by 1.2860 and then 1.2770. The latter is the most important for it marks the top of the prior long-term resistance range. If this level were to give way at some point then we could see an eventual drop towards the 200-day moving average and next line of support around 1.2600.

On the upside, the next area of resistance is seen around the 1.30 handle. With the RSI being at ‘overbought’ levels of above 70, we are on the lookout for a reversal pattern around these levels. However, the RSI can remain overbought for a long time, and this alone should not be viewed as a “sell” signal. If the 1.30 handle fails to hold down the cable then there is really little further resistance until the 1.33 area.

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