Analys från DailyFX
GBP/USD: Can Inflation Reverse the GBP Pain Chain?
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Talking Points:
- GBP/USD Technical Strategy: Longer-term price action still bearish trading near 30-year lows.
- With U.K. inflation set to be released tomorrow, the potential for sharp price movements is elevated.
- GBP/USD is still trading near historically-low levels; most technical observations will be relegated to near-term analysis.
- If you’re looking for trading ideas, check out our Trading Guides; they’re free and updated for Q4.
In our last article, we looked at the fleeting semblance of support in GBP/USD after news of a ‘Hard Brexit’ scenario began to dominate the headlines as of a few weeks ago. Before that happened, there was a legitimate case to be made for higher prices in Sterling: The currency had spent the previous three months working on a series of ‘higher-lows,’ and each time that Mr. Mark Carney of the Bank of England talked the currency lower, support came in at a slightly-higher level.
Much of this theme was buttressed by the logical assessment that inflation would likely begin to show in the U.K. after the ‘sharp repricing’ in the value of the British Pound (after the Brexit referendum). Initially after such a scenario, inflation usually begins to show up with imports, and this is pretty much just a mathematical observation: If a product is created, built, sold and exported out of the United States, a plunging British Pound means that this producer will bring back fewer US Dollars from U.K. sales if they don’t adjust their prices. And given that most businesses are driven by profit motive, these price increases usually show up pretty quickly, and here we have the initial signs of inflation.
But inflation isn’t always a direct determinant of currency prices, is it? The missing piece here are interest rates, as Central Banks will often look to raise rates in order of managing inflation, and this higher rate driving demand into the currency is what can really get that common but direct relationship between inflation, interest rates and spot prices all moving in the same direction.
And that’s where the relationship is or has broken down of recent. The Bank of England has been clear about the fact that they can go even more dovish if need-be, and this has been acting like a weight on the value of the British Pound where ‘good’ news for the currency or the economy is shrugged off while bad news is over-accentuated. So when news of a ‘Hard Brexit’ scenario began to look like a potential outcome, sellers slammed the Sterling lower and there simply haven’t been any ‘positive’ factors to give sellers a reason to cover or for buyers to enter the equation.
Should tomorrow’s U.K. inflation numbers surprise to the upside, this could possibly begin to change as markets may factor in a lower-probability of continued dovishness from the BOE in response to rising inflation. But traders are going to want to go into those data releases with a healthy amount of skepticism as most GBP charts remain considerably bearish.
For traders looking at short-side positions, potential resistance at prior price action inflection points in or around zones near 1.2250 and 1.2325 could be interesting for trend or continuation strategies. For bullish positions, traders are likely going to want to wait for prior swing resistance at 1.2335 to be taken out before looking to implement top-side approaches.
Chart prepared by James Stanley
— Written by James Stanley, Analyst for DailyFX.com
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What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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