The British Pound has been one of the worst performing currencies this year, losing -6.94% to the US Dollar through Friday’s close. (Only the Australian Dollar and the Japanese Yen are performing worse against the US Dollar, down by -7.15% and -14.37% through Friday, respectively.)
Over the past several weeks, the Sterling has been befallen by weak consumption data and signs of disinflation, provoking market participants into thinking that the Bank of England could revisit its QE program in August or September, after Mark Carney takes over the governorship from Mervyn King.
On the flip side, the US Dollar has been the benefactor of an increasingly hawkish tone from the Federal Reserve, best highlighted by Chairman Ben Bernanke’s testimony in front of a congressional committee last week, in which he indicated that if the US economy continues to improve, there is scope to slow the pace of QE3 incrementally.
Now, the US Dollar is taking on a hybrid role not only as a safe haven, but also as a growth currency, as US Treasury yields rise. With another batch of strong US data out due this week alongside neutral UK data, there is potential to see the GBPUSD slowly grind back towards its May lows, set last Wednesday, just above the psychologically significant $1.5000 level, at 1.5013.
A look at the 1 hour chart below suggests that a technical break in line with my view may already be beginning, denoted by the Bearish Rising Wedge. Accordingly, with a break and close below support this morning, there exists a favorable short GBPUSD setup that may evolve over the course of the next five to ten days.
GBPUSD 1-hour Chart: May 27, 2013
Charts Created using Marketscope – Prepared by Christopher Vecchio
STRATEGY – SHORT GBPUSD
Entry: At market (1.5110 at the time of writing)
Stop:1.5165 (above weekly high; above “Bernanke testimony” swing high) (-55-pips)
Target 1 (Reward/Risk Ratio): 1.5015 (76.4% Fibonacci retracement, March low to May high) (+95-pips, 1.73)
Target 2: 1.4835 (above yearly low) (+275-pips, 5.00)
Timeframe: 1– to 2-weeks
GBP EVENT RISK – May 26 to May 31
USD EVENT RISK – May 26 to May 31
— Written by Christopher Vecchio, Currency Analyst
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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