GBP/USD sold off earlier in London after second quarter GDP in the UK came in-line with forecasts at 0.8% q/q and 3.10% for y/y. Despite the best reading since Q4 2007, the pound sold off as many traders abandoned long positions and some macro traders will wait till price takes 1.70 before considering go long again.
Across the Atlantic, the U.S. economy had two fairly solid releases regarding both housing and jobs data. Jobless claims printed at 326k, worse than the forecast of 310k, but the dollar only trimmed some of its gains, mainly because trend is still headed in the right direction regarding the U.S. job market. The other key release was Existing Home Sales for April, which came in at 4.65 million, slightly lower than the forecast of 4.69m, but better than the prior reading 4.59m. After yesterday’s Fed Minutes, traders will be keeping a close eye on the housing market as the Fed is fairly concerned that if we see weakness return, we may see a delay in tapering and interest rates may remained trapped below 3.0%.
Price action on the daily chart shows that price has remained relatively bullish since forming a bullish Gartley pattern on March 24th, a move that also coincided with the respect of the 100-day SMA. Last week, after failing to test the 1.70 handle, price fell toward 1.6730, which is the 50-day SMA. After a 5-day rally, we are seeing a key reversal occur that may trigger a decline that will test the lower boundaries of the bullish channel highlighted in black.
If bearish momentum triggers a daily close below 1.6775, a stronger correction may target the 100-day SMA at 1.6641. Major resistance will come from the 1.6920-1.70 zone.
The trade: Sell GBP/USD at 1.6855 with a stop loss at 1.6955 and a take profit at 1.655. The Risk/Reward Ratio is 1:2.
Edward J. Moya
WorldWideMarkets Online Trading