The overall market position was a bullish bet on the British pound. The rally was supported by the UK economic recovery, but the inevitable round of rate hikes may have been delayed today, after data showed that growth may be slowing down in the U.K. Wages and jobless claims statisitics provide a problem for the Bank of England. Jobs are being added without any wage growth. This will force the BOE to delay any rate hikes.
Price action this morning witnessed a key slide towards 1.6800 after the economic data releases and then a fresh collapse to 1.6700 after we received BOE governor Mark Carney’s Inflation Report. The Bank’s wage growth forecast was revised down to -0.25%. The report was very pessimistic and should force out many bullish bets and allow for a deeper pullback.
The British economy also has a few other key hurdles it will need to get by before opening the door for macro bulls to return to their longer term bullish bets. The General election next may, EU membership, and we will shortly see if Scotland votes for independence, are catalyst for uncertainty in the future direction of Britain and could weigh heavily on sterling.
GBP/USD did stabilize a little after in the US retail sales for July came slightly changed, but the worst performance in 6 months. Key resistance will come from the 100-day SMA at 1.6879. Downside targets include the 23.6% Fibonacci retracement level of the rally that began last summer. Major support rests at the 1.6655 level. If we do see a daily close below that threshold, one last slide may target the 38.2% Fibonacci retracement level 1.6282. It is around that area that macro traders may find value and resume a bullish trade.
The trade: Sell GBP/USD at 1.6725 with a stop loss at 1.6775 and a take profit at 1.6630. The Risk/Reward Ratio is around 1:2.
Edward J. MoyaTechnical Strategist