Early in London, the British pound weakened after a report showed that UK inflation fell to the slowest levels in almost 15 years. CPI for December 2014 slowed down to 0.5% y/y, much lower than the forecast of 0.7%. With no expectations for higher interest rates by the Bank of England, sterling may remain under pressure and could very well break below the psychological 1.50 handle.
GBP/USD plunged overnight and made a low of 1.5076, but has since recovered most of its losses. The rebound was triggered by BOE Governor Carney looking to normalize interest rates in the foreseeable future. Despite the rally, numbers don’t lie, and record low inflation should derail any rate hikes.
Price action on the GBP/USD weekly chart shows last week’s initial respect of the 1.50 handle, with price making a low at 1.5033. If downward momentum returns immediately, price should be able to break below the 1.50 barrier and target the 1.4800 region. Deeper support might come from the 1.45-1.4550 zone.
If we don’t see fresh lows, major resistance will come from downward sloping resistance line shown in red. If that trendline is taken out, further bullishness should be faded with stops just above the 1.5615 level.
The trade: Sell GBP/USD at 1.5170 with a stop loss at 1.5270 and a take profit at 1.4870. The Risk/Reward Ratio is 1:3.
Edward J. Moya
WorldWideMarkets Online Trading