The British pound had a modest rally on Wednesday after a UK government official said both houses of Parliament would have to review any new treaty stemming from Britain’s negotiations of its new relationship with the EU. Recent sterling weakness at the start of the trading week was limited and attributed to BOE governor Carney’s comments that monetary policy cannot do everything, stimulus is not without limit. He also reiterated his view that BOE does not target the exchange rate, but we are not indifferent to it.
While the bearish trend is firmly in place, we did see sterling rally for the first time in 6 days and if we do see a beat with Thursday’s UK GDP data, we could see the currency pair tentatively breakout above the tight 200-pip range. Expectations are for Q3 GDP quarterly to decline to 0.3% from the prior 0.7%. Year over year GDP is expected to remain steady at 2.1%.
Price action on the GBP/USD daily chart shows the bullish ABCD pattern that formed on October 7th. Point D was targeted with the 261.8% Fibonacci expansion level of the B to C leg. If the bullish pattern remains valid and we do see price break out higher, key resistance will come from the 1.2450 to 1.2500 zone. If the longer-term downward trend returns, major support remains the psychological 1.20 handle.
The trade: Sell GBP/USD at 1.2500 with a stop loss at 1.2550 and a take profit at 1.2300. The Risk/Reward Ratio is 1:4