Last week the $EURGBP finally broke the range. It broke that range to the upside and confirmed with a close above the 0.8600 range top.
$EURGBP opens the new trading week trading above 0.8600 level for the first time since March. This is a bullish move with a potential move to 0.8750 now in the works. Any dips should be supported by the former 0.86 range top. A daily close below 0.8570 invalidates this bullish setup.
The $GBPAUD finally staged a long overdue correction. Now what? Will the pair follow the AUD lower and resume its rally or will it follow the GBP lower?
Given the Fibonacci levels on the daily chart and the diverging RSI on the 4hr chart, it looks highly probable that the pair resumes the bull trend. However, be aware of the Carney effect.
New BoE Governor Mark Carney surprised markets today as he made his 1st move on British monetary policy. Instead of the traditional silence on monetary policy hold, Carney not only made comments but gave a full statement to introduce the markets to forward guidance.
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.
Not only has Carney told the market not to expect interest rate rises, he also telegraphed a possible move in policy as soon as next month. And don’t expect positive economic data to stop them either. This make the August BoE meeting even more important and all eyes have already moved towards expectations for it. We can see that already in today’s price action. Pairs that have enjoyed breakouts like the $GBPAUD, $GBPNZD, and $GBPCAD are seeing long overdue corrections. The $GBPUSD remains entrenched in its bear trend and threatens to break down to new lows. A breakout in the $EURGBP seems imminent.
But US markets are on holiday today so the reaction has actually been muted if you can believe it. Expect the real fireworks when US traders return to all this forward guidance (the ECB is announced forward guidance today as well) and the US NFP release. Happy 4th!
$GBPAUD ripped higher on the back of a AUD weakness-GBP strength double whammy. During the Asian session overnight, the Reserve Bank of Australia Governor Glenn Stevens jawboned the Aussie off a cliff. In fact, the market is now pricing in an increased 60% chance of a RBA rate cut in August. As a result, the AUD was throttled across the board allowing the $GBPAUD to rally to 1.6750. Then UK services PMI surprised to the upside and further carried the $GBPAUD to new highs at 1.6858.
With this news-induced rally, one would anticipate that the $GBPAUD would have broken to new highs on the daily chart. After all, the fundamentals just laid out should support such a breakout. The $AUDUSD certainly did break down to lows not seen in 3 years. The $GBPUSD found a bottom at new lows to break above 1.6250 resistance that had capped price all week. And yet we find the $GBPAUD struggling to take out the top at 1.6877. Perhaps the market awaits the BoE decision tomorrow. Perhaps the market will wait for the 4th of July holiday to pass. Whatever the reason, bulls should be cautious. This rally is looking exhausted with the weekly chart is still working out overbought conditions. All of which makes the $GBPAUD very toppish at these levels.
This Thursday, the Bank of England (BoE) will deliver its first interest rate decision under Mark Carney. It is widely believed that the BoE will hold monetary policy given that Carney officially stepped into office just 4 days prior. However, Carney could surprise us.
While his official start date was yesterday (July 1), Carney completed his tenure with the Bank of Canada on June 1st. So hypothetically he could have started work on the UK for 30 days already. He certainly has an opinion on British monetary policy (seen here). And the BoE has a good track record for surprising markets.
But enough with the musing. Either way Thursday’s decision goes, the $GBPUSD has resumed its bear trend. After falling to the critical long term support zone between 1.5270 and 1.5230, price fell below it to end the month of June. Bounces have been capped at 1.5250 and price has since fallen to new lows today at 1.5136. Though still in this upward channel, cable is poised to break to the next level of support at 1.5075. If price breaks lower, all eyes are the big psychological level at 1.5000. Given the respect of the Fibonacci retracement levels, cable is still on track to break to new lows below 1.4830.
The $EURGBP has been rangebound between 0.8600 and 0.8470 for 10 weeks. While impressive, this is not uncharacteristic of this currency pair. When it fell below 0.8500, it lingered at the bottom of the range for 3 days. I expected a continuation to the downside after the 3rd day of still pivoting around, and mostly below, 0.8480. I bailed out of a long position hours before the $EURGBP finally broke to the upside respecting the range.
Now, the pair is at the top of the range moving as high as 0.8575. As long as price closes daily below 0.8600, the range remains intact and we’ll see a move back to 0.8500. This time, I will be more patient.
The $GBPAUD breakout has been epic. It was one of those amazing rides that you only participate in in portions. There is not a trader who captured every single pip of this move. There are many who did, however, rake in a killing take portions of this gigantic trend wave that broke out to new 2-year highs.
Looking at the weekly chart, it is interesting to note that this is only a 1st bullish wave. Now after 10 bullish weeks, we are starting to see a pullback. The RSI is severely overbought and has been for several weeks now. So a top was not only inevitable, it was necessary.
Watch 1.6380 today. Price has bounced from this support level before. If we can get below 1.6380, then price will move toward 1.6270, the 50% Fibonacci level of June’s rally and previous support. From there, price will confirm this new AUD bear trend or allow for a deeper correction still.
It’s the last week of the month. I’ve been playing this seasonality trend in cable since April. Admittedly, May has been a much better month for me. But, alas, the edge is almost over. $GBPUSD has put in a bottom at the end of May for the past 3 years. Why should this May be any different?
If cable does put in a bottom, it begins that process this week. 1.5000 is a great level to do it at. A failure to break below the 1.4830 lows after a perfect hold of the big 50% Fibonacci level at 1.5606 will be technical reason enough for many traders to get bullish $GBPUSD ahead of Carney’s inauguration.
Topping is a process.
— Christian Gagnon (@InEgo_) May 28, 2013
Today’s price action is huge. UK CBI retail sales released today was soft. It was a HUGE miss in the largest sector of the UK economy and GBP rallies. That is red flag for sellers; a signal not to be taken lightly. Price may take another stab at 1.50. The market may even break below it. But a strong GBP on bad news (and a weak USD on no news) is not lost on me today. I’m not looking to sell on this rally as I was weeks earlier. Watch how price behaves at lows. Bottoming is a process too. Will $GBPUSD bottom again this May?
Mentioned above:
Seasonality is an interesting trading edge. Like correlation, it works until it doesn’t.
Taking a closer look at the $GBPUSD seasonality pattern: the pair rallies for the month of April, finds a top at the end of April, and sells off for the month of May. It’s pretty incredible the reliability of this pattern. We find it playing out perfectly in the past 3 years.
Every May since 2010, $GBPUSD has sold off hard to the tune of 500 pips or more. By the end of May, cable puts in a bottom. Conversely, every April since 2010, cable has rallied only to top out at the end of the month. This April was no different. Why should this May be any different?
So here we are in the 1st trading week of May and since topping out in April at 1.5606, $GBPUSD has put in lower highs and lower lows. The swings have been very wide and very volatile. Each new low has been met with bids that push price right back to highs. But this type of volatile price action is very characteristic of cable when it is experiencing a change in sentiment and, therefore, direction. What is important to me is that cable is carving out the very definition of a DOWN trend, lower highs and lower lows, despite the volatility.
Looking at the big picture, we see where cable was going and why on the rally. I’ve laid out that bullish scenario all April long (see below).
With sellers back in the picture, the 1st target to the downside is a massive support zone on the weekly chart. This zone sees long term support at 1.5250/30, the 50%Fibonacci level of the April rally at 1.5213, the 61.8% Fibonacci level at 1.5118, and the 1.5075 support level that buttressed the rally to 1.5600. A break below all of these levels would certainly accelerate price lower. The 50% Fibonacci correction to 1.5606 suggests that cable is looking to put in a new low below 1.4830. The seasonality trend says we could very well get there. Here’s to May!
Read Also:
Here is an chart update for “GBP/USD Can Still Go Higher” posted last week. Buys were never initiated (for me) with price above 1.5300 last week. Sellers never got going either with strong bids at 1.5300 keeping price propped enough to make new highs above 1.5400. Strategy now in play with $GBPUSD breaking 1.5300 support of last week in early Tuesday (New Zealand/Sydney) trading. Read full analysis for key levels.
