Sterling has remained in a strong bearish trend since the dog days of summer. With only a few bounces, this collapsing currency is struggling to find support. Today’s pound rally was stemmed from the not so dovish BoE minutes of the November 5th and 6th meeting. The minutes highlighted a mild concern regarding inflationary pressures.
My post from last week, explained that downside risks remain firmly in place from the Eurozone and expectations are for the Bank of England to have no rate hikes until October 2015. If we see rising wages or if CPI doesn’t fall any lower, rate hikes may happen next summer. The bearish trend is still valid, but traders should not be surprised if we see unwinding of sterling short positions.
Price action on the daily chart shows the potential formation of a bullish ABCD pattern. Currently price is respecting the 200% Fibonacci expansion level of the B to C leg. While price appears poised to snap this current five day losing streak, we will wait for price to invalidate this potential pattern. The downside target is well above 1.5321, which is the 78.6% Fibonacci retracement level of the 2013 low of 1.4812 to 2014 high of 1.7190.
If we don’t see fresh lows, major resistance will come from the 200-weekly Simple Moving Average at 1.6018. If that level is taken out, further bullishness could target the October high of 1.6250.
The trade: Sell GBP/USD at 1.5580 with a stop loss at 1.5610 and a take profit at 1.5425. The Risk/Reward Ratio is almost 1:5.
Edward J. Moya
WorldWideMarkets Online Trading