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GBP USD still vulnerable even if BoE is turning hawkish

Article By: ,  Financial Analyst
July 20, 2015 1:43 PM

The pound was among the top performing currencies in G10 last week after the Bank of England Governor Mark Carney hinted that UK interest rates could start to rise soon, possibly at the start of 2016. The pound rallied across the board, even ending the week higher against the US dollar which itself has been supported after the Federal Reserve talked up the possibility of a 2015 lift off.

As a result of guesstimating the timing of potential rate increases in the UK and US economies, the GBP/USD has recently entered a consolidative phase. But over the past four trading sessions, the USD has just about been edging it, suggesting the Cable is not out of the woods just yet.

The GBP/USD’s weakness over the past few days can also be explained away by looking at the technical. As can be seen on the chart, price came under some technical pressure at end of last week after it tested the broken long-term bullish trend line and horizontal resistance around 1.5670. The GBP/USD is now hovering around its 50-day moving average at 1.5560 and looks like it wants to head towards the next near-term support at 1.5500. The key support level to watch is further lower around 1.5415: here a short-term bullish trend line meets the 200-day moving average.

Below the above-mentioned supports is this month’s low at 1.5330. For as long as price holds above here and below 1.5670, we are neutral on the Cable. That’s because the last higher low is still intact. But it may already have formed a lower high around 1.5670. A break below 1.5330 is needed to confirm this. If seen, we would therefore also have our first lower low, thereby confirming the resumption of the long-term bearish trend.

Alternatively, if the GBP/USD goes on to break above the 1.5670 resistance level then it would invalidate the lower high signal that was created last week. In this scenario, price may go on to re-test the prior resistance around 1.5815 before deciding on its next move.

Either way, we will soon find out who the market thinks will raise rates first. We suspect it will be the Federal Reserve and thus expected to see lower levels for the GBP/USD.

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