GBP/USD seeks direction within sustained bearish trend
James Chen, CMT May 23, 2016 12:40 PM
GBP/USD has been confined in a trading range between its 200-day moving average to the upside and 50-day moving average to the downside for the past month as the currency pair has been seeking direction ahead of a few major events next month. The fact that price has remained below its 200-day moving average, however, continues to underscore the overall bearish trend that has persistently defined GBP/USD.
With exactly one month left to go before the UK holds a referendum that will decide whether or not it stays in the European Union, the British pound has generally remained resilient in the face of substantial downside risk to the currency that would very likely result from a successful "Brexit" vote. This resilience has largely been due to recent polls in the UK that have shown increasing support for remaining in the EU and decreasing sway from the "leave" camp. Aside from the Brexit issue, last week saw mixed data out of the UK, including a lower-than-expected inflation reading in the form of the Consumer Price Index, and better-than-expected numbers for average earnings, unemployment claims, and retail sales.
On the other side of the pond and the currency pair, the US dollar has surged and continues to stay well-supported due to hawkish minutes from April’s FOMC meeting and other comments from Fed members last week. These Fed signals stressed more strongly than usual the high likelihood of an impending interest rate hike that would be contingent, of course, upon continuing improvement in economic data. With recent US data indeed showing positive signs for economic growth, employment, and inflation, markets have increasingly come to lean towards anticipating a potential rate hike either in June or July.
This week has in store important data releases from both the UK and US that could have a significant impact on the current fundamental environment for the pound and dollar. In the UK, Parliament’s inflation report hearings will take place on Tuesday, and revised GDP (second estimate) is slated for Thursday. In the US, the primary release will be Friday’s preliminary GDP (second release), which should have a substantial impact on the Fed’s consideration of current US economic growth, as well as durable goods orders and weekly jobless claims on Thursday.
From a technical perspective, GBP/USD continues to display a long-term bearish trending bias, as it continues to trade under both its 200-day moving average and a key downtrend line extending back to the August high of last year. This month, the currency pair has already attempted to rise above these dynamic resistance factors twice but has turned back to the downside both times. Currently trading under the 1.4500 level, GBP/USD should continue to be pressured as long as it remains below the noted resistance. This pressure could be especially strong in an environment of increasing expectations of a near-term Fed rate hike as well as the still-present specter of a possible Brexit. With any further retreat from the 200-day moving average and the noted downtrend line, the major downside target remains at the 1.4000 psychological support level.
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