GBP/USD continued its multiday rally this morning, jumping over 160 pips intraday. After finding strong support at the 1.22 level last Friday as US import prices month-over-month remained static despite expectations, bullish momentum continued Monday as net foreign investment in US securities was far lower than expected. This price action was exacerbated today by positive news for the pound as the UK’s Office for National Statistics revealed higher than expected average earnings for employees, and a national unemployment rate of 3.7%, below the anticipated 3.8%. Let’s take a closer look as we discuss how to trade GBPUSD now.
In terms of fundamentals, the UK and the US currently share a few noteworthy similarities: both countries’ central banks have benchmark interest rates at approximately 1%, and the UK’s unemployment rate is a mere 0.1% greater than the US. However, the differences are many, and significant. Gross Domestic Product in the US most recently contracted by 1.4% quarter-over-quarter compared to modest GDP growth in the UK, while US inflation year-over-year declined by 0.2% while year-over-year inflation in the UK continued to sharply rise.
These numbers are arguably something of a façade for GBP/USD bulls though, as the case for the USD against the GBP is far more compelling: a) the Federal Reserve is comfortable with more hawkish moves than the Bank of England, recently resorting to a 50 basis point rate hike rather than the more palatable 25 basis point hikes; b) inflation in the US is stronger than year-over-year data implies, because month-over-month inflation is still going strong, which is relevant considering year-over-year inflation in the US is still over 1% higher than in the UK; c) trade in the UK is still marred by post-Brexit messiness, as evidenced by recent tensions with Sinn Fein, Northern Ireland’s new ruling party, over established borders and trade relations.
Any traders on the lookout for a fundamental catalyst before entering a position in GBP/USD should keep their eye on two anticipated events: Jerome Powell due to speak about US inflation at 2 pm EDT today, and the UK’s year-over-year CPI data, due tomorrow morning at 2 am EDT.
Technical indicators are currently offering rather mixed information. On one hand, price action reversed course upon finding a powerful support level at 1.22, and has now broken out to the upside of the nearly month-long steep trend line, and corresponding moving averages, that have been serving as a resistance level. However, when we look at the bigger picture, these bullish signals are put in check by the stark reality of a year-long bearish trend that has seen the pair plummet from 1.42 to 1.25. We may well see a retest of resistance at 1.26, where I personally plan on entering a short position, with the hopes of taking profit at 1.22.
According to A1 Trading’s EdgeFinder tool, retail sentiment is rather neutral, with 52% of retail traders going long on GBP/USD while 48% go short. This contrasts with the degree of institutional sentiment in the US, as the current Commitments of Traders (COT) data reflects over 76% going long on the USD, while just over 21% are going long on the GBP. This sentiment fits the current global economic climate as well, as traders will likely continue to flock to the US Dollar as a safe haven asset as recession fears linger around the globe.
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