GBP/USD: Still trapped below 1.4600 as traders warily eye the BOE

For the morning after Valentine’s Day, it still feels like love is in the air, at least for risk bulls. European equity markets are trading 3-4% higher across the board, oil (WTI) is rising back to test the 30.00 handle, and the US Dollar Index continues to recover off Thursday’s four-month low. With many US traders off the desk celebrating the President’s Day holiday, trade is likely to slow down dramatically when European markets close, so bears may only have a few hours to turn around the risk-on momentum.

One currency pair that’s stood aloof to all the volatility over the last week has been GBP/USD. For the last ten days, Cable has merely consolidated in a tight range below previous-support-turned-resistance around 1.4600. From a fundamental perspective, the biggest factor driving the pair is central bank interest rate expectations. Of course, traders have started to price out another rate hike from the Federal Reserve amidst the start-of-the-year market turmoil, but the far more interesting developments have been on the BOE’s side of the equation.

It seems like only yesterday that traders though the BOE would be right behind the Fed in embarking on a prolonged interest rate increase cycle, but the market’s perception has changed completely over the last few months. While economists still feel that the BOE will raise interest rates late this year, or in 2017 at the latest, traders have actually started to expect an interest rate cut as the more likely scenario. According to the interest rate futures markets, traders are pricing in a 60% probability that the BOE’s next move will be to reduce interest rates, and that a subsequent rate hike isn’t likely until mid-2018. Thankfully, this week’s data on UK inflation (Tuesday), employment (Wednesday), and Retail Sales (Friday) should help provide some clarity for traders. That said, the looming risk of a "Brexit" vote (UK exit from the European Union) later this year could keep traders, and the BOE, on edge for the foreseeable future.

Technical view: GBP/USD

As we noted above, GBP/USD has been consolidating below major previous-support-turned-resistance at 1.4600 for nearly two weeks now. For many traders, this level represents a key "line in the sand": as long as GBP/USD remains below that barrier (and the 50-day MA at 1.4630), the longer-term downtrend is still seen as intact and the bounce off the January lows merely represents an oversold bounce. The secondary indicators support this bearish interpretation, with the MACD still holding below the "0" level and the RSI indicator solidly in a bearish range below 60. On the other hand, if GBP/USD can break back above 1.4600, the case for further strength toward the upper-1.40s or even the 1.50 level, grows stronger.


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