Sterling opened trading in Japan around the 1.6560 level and slowly climbed higher overnight as expectations were optimistic for the economy to grow at its fastest rate in 6 years. The preliminary reading for fourth quarter GDP data came in at 0.7%, lower by a tick from the prior reading, but well below the whisper number of 0.9%. In 2013, the economy grew at 1.9%.
Expectations remained split on whether the Bank of England will raise interest rates this year. The pace of the recovery is expected to cool off and possibly grow at 0.5-0.6% for the rest of the year. If that is the case, central bank may hold off any tightening until 2015.
Price action on GBP/USD has been consolidating around the 1.6500 and 1.6666 area for the last week. The markets are not overreacting to today’s U.K. GDP as everyone awaits whether or not the Fed will continue the tapering pace it set forth at its last meeting. The bullish trend starting on July 9th is still valid, but the pace of higher highs and higher lows has dramatically eased and overbought conditions remain elevated on the daily charts.
The bearish regular divergence displayed on the weekly chart is tentatively failing to produce a major correction and is now potentially leading to price to form a broadening formation. The corrective pullback may only target a move towards the 1.6250 pivot level. Currently price on the intra-day 5-minute chart is displaying a bearish ABCD pattern and a double top pattern at the 1.6610 level. Price is rallying on the U.S. durable goods poor print. This reading provides increased speculation that taper pace of the Fed will not be as quick as some are expecting. One report or statistical release however will not derail a central banks mind.
Key resistance resides at the 1.6666 level and is followed by major resistance at 1.6750. Any significant surge above that level could confirm a breakout towards the psychological 1.70 level.
The trade: Sell GBP/USD 1.6610, with a stop loss at 1.6710 and a take profit at 1.6310. The Risk/Reward Ratio is 1:3.
Edward J. Moya
WorldWideMarkets Online Trading