Yesterday, I outlined the case for a potential rally in sterling via the $GBPUSD currency pair. But there are other sterling pairs that are also showing potential for GBP strength as well. Let’s look at two of those pairs.
The $EURGBP had a bearish divergence as it found resistance yesterday against 0.8500 major psychological level. However, sterling weakened tremendously into today’s Bank of England (BoE) rate announcement (the 1st of 2Q2103) causing the pair to spike above 0.8500 to a high of 0.8521. Now that the event risk has passed, the pair has moved lower and looks to target support at 0.8400. A break below targets the 50% Fibonacci level at 0.8285 giving GBP a 200-pip rally.
The $GBPNZD had a bullish divergence yesterday even as it dropped to new lows at 1.7909. The pair rallied to the major psychological level at 1.8000 where it found resistance into the BoE rate announcement. However, like $EURGBP, after the announcement sterling strength pushed the $GBPNZD above 1.80 to a high today at 1.8054. Even on today’s intraday pullbacks, price is managing to now find support at 1.80. If this level can hold as support, this pair can rally back to the resistance zone between 1.84 – 1.8450. A break above this resistance has the potential to rally to 1.8900, the 50% Fibonacci level of the entire breakdown, giving GPB in this pair a 900-pip rally.
Given these daily charts, I have to stress that GBP strength goes against the very strong bear trend that has seized sterling since the beginning of this year. Any rally will be VERY choppy, meaning, highs will be met aggressively by sellers. We have seen this in $GBPUSD just this week with highs at 1.5260 on Monday being sold to 1.5075 lows; and again with Tuesday highs at 1.5150 being sold to 1.5033 today. Therefore, it is prudent to take profits at resistance levels rather than hold for large swing moves. It is also prudent to pay close attention to the BoE. If the vote shifts to more members wanting additional QE or if an actual QE increase materializes, all bullish bets are off. However, the converse is also true. If fewer members call for QE and monetary policy continues to be on hold, a sterling rally can really take hold. The BoE minutes are due out in a couple weeks. That will give us our first 2nd quarter impression of what the BoE sentiment really is.