The GBP traded lower yesterday for the 5th day in a row ahead of today’s Bank of England interest rate decision. The weakness in the GBP isn’t really based on anything fundamental. In fact the manufacturing PMI beat estimates, and the services PMI, despite being slightly weaker than expectations coming in at 56.7, was still above the important 50 level showing that the services industry (which the economy of the UK is heavily reliant on) is still expanding.
The US dollar index pushed to new highs as the euro broke 1.1097, making fresh 11-year lows in line with our expectations within the final push developing in wave 5. In the US the ISM non-manufacturing index came out higher than expected, marking the second improvement in a row. The chairman said that gains in employment were driving the services industry and pushing the expectations higher for tomorrows non-farm payrolls number.
Bank of England governor Carney announced last month that oil has kept inflation in check and even if they start to see inflation remain low it does not mean that rates will stay this low indefinitely. The market is obviously expecting a rate rise later in the year, but no change today. The recent sell-off, we believe, is a retracement from the last months' up move.
If we look at our longer-term chart, we have been anticipating a multi-week rally to take place with the RSI being oversold for the five months between September and the beginning of February. Taking into account the 7-months sell-off in the GBP/USD, we believe that the recent retracement is too short, and the move up to 1.5550 is the wave A of a multi-week correction from the 1.7192 highs.
Source: Bloomberg Charts
If we break the retracement down from the January 23rd lows it was clear from the 4-hour charts that the GBP/USD was due for a sell-off with triple divergence clearly seen in the MACD. Taking into account yesterday’s move lower reaching the 50% retracement as well as the breakout from the 12th of February at 1.5260, we will are starting to look for a bottom in the wave B to form. Obviously ahead of tomorrow’s NFP we would not try and catch the falling knife but start to look for short-term turning patterns down to 1.5180.
GBP 4 Hour Source: Bloomberg Charts
It is not necessary to try and pick a bottom, wait for the indicator to show that one has been made. From the long-term chart we can see that when this does stop dropping the next leg up should have a minimum target at the 38.2% retracement area at 1.5850, with a possible extension all the way up to the 1.6200 area. However we do believe that with the upcoming election in May it will be difficult to reach those levels. Once the rally does start, expect around 1 month of rallying before the news and uncertainty regarding the governance of the United Kingdom starts to weigh again on the pound.
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