GBP/USD had a strong day on Tuesday as it continued its bullish run of late. The market is certainly dumping the Dollar in this pair, and the push to the 1.58 level was a good sign of strength. However, the level did hold, and this shows that perhaps we are running out of steam at this point.
The pair has shot up roughly 500 pips for the month of January, and is certainly in the overbought mode at this point. The 1.58 level is significant resistance, and it is going to take real pressure to get the price on this pair above that level. It is because of that we are waiting until a daily close above that handle in order get long of cable. The level is actually a better place to find a short in the pair, but the recent activity is hard to go against as well.
The angle of the rise is what most leads us to believe that this pullback could be coming. Also, there is serious chatter in the currency markets about the possible extension of quantitative easing by the Bank of England at the next meeting in a few short days. This would certainly weaken the pair as the most recent thrust higher has been boosted by the Federal Reserve’s pledge to keep interest rates low until at least the end of 2014. In a situation like this, suddenly the Pound wouldn’t be “less bad” than the Dollar, and thus a balance should come back into play.
Also, the European Union is the destination for 40% of British exports. There is absolutely no way that the recession in the EU won’t have an effect on the British economy. Because of this, we expect to see serious weakness in the UK going forward.
However, one mustn’t argue with the markets. If the pair managed a daily close above 1.58, it will be obvious that the currency traders simply don’t care, and they are buying the pair to get to at least 1.60 or so. On signs of weakness, and especially a breakdown below the bottom of Monday’s shooting star, we would gladly sell this pair to head towards the 1.55 level.
Written by FX Empire