Mayday for the Pound-Dollar as it Crashes through a Key Support Line on the Charts
- GBP/USD has broken below a major trendline opening up the promise of further weakness
- Sterling has been hit by a run of poor data which indicates the Bank of England is much less likely to raise interest rates
- The Dollar continues to outperform ahead of the the key FOMC meeting this evening (Wednesday)
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Technical analysts are aflutter mid-week on observing the GBP/USD has dropped through a major chart level amidst an ongoing broad-based selloff in Sterling and the ongoing bullrun in the Dollar.
The British Pound side of the pair is getting hammered because it now seems unlikely the Bank of England will raise interest rates anytime soon whereas in the US the opposite is true, and the US Federal Reserve is expected to accelerate its programme of raising interest rates - the widening divergence means a stronger US Dollar because international capital tends to flow to where it an earn the most interest.
Although Gordon Gecko famously disparaged chart analysis when he told Charlie Sheen's character in Wall Street to "go back to your charts, sport" technical analysis is actually an arguably more objective method of analysis, especially in the fundamentaly complex FX market.
A chart analysis of the Pound-to-Dollar rate at the moment is showing seriously bearish dark clouds over the horizon, which cannot be ignored.
The pair has now clearly broken below a key chart level, ushering in a much more bearish outlook for the pair.
Pound-to-Dollar - which is currently trading at 1.3640 on the interbank market - has now convincingly broken the major trendline drawn from the March 2017 lows (see below). Major trendline breaks are very negative technical signs which can suggest a change in the primary trend and/or steep declines ahead.
The next target lower could be as low as 1.3385 using the usual technical method of taking the height of the move immediately prior to the break (labeled 'a') and extrapolating it lower (labeled 'b') by a ratio of the golden mean (0.618) from the break.
Alternatively, it could fall to 1.3415 (our favoured target) where the 50-week MA is situated, or even 1.3535 where the 200-day MA is situated, as major moving averages act as tough obstacles to the trend.
The general consensus amongst analysts is that a decline to the 200-day at circa 1.3535 is a safe bet.
"GBP/USD has eroded major support at 1.3694/58. This is the location of the September peak and 2016-2018 uptrend and failure here should lead to a slide back to the 200-day ma at 1.3535 and eventually the 55-week ma at 1.3371," comments Karen Jones, technical analyst at Commerzbank.
Jones is not the only one to highlight the importance of the 200-day MA at 1.3535. Quek Ser Leang, an analyst at UOB, also sees this as a potential target level for the pair.
"The outsized decline appears to be running ahead of itself but with no sign of stabilization just yet, further weakness would not be surprising. That said, it is unlikely GBP would be able to maintain its current torrid pace of decline. From here the next level to aim for is 1.3540," says Leang.
Yet whether the 200-day moving average (MA) holds may be a moot point, judging from the broader Dollar trade-weighted index (DXY) - that is the Dollar versus a basket of its most highly traded partners. For the DXY has already broken through the 200-day MA, suggesting a higher likelihood that the same could happen in individual pairs, such as GBP/USD. This is especially true given the recent poor run of GDP, PMI and Consumer Credit data from the UK as well as the increasingly tense Brexit 'shenanigans' relating to the Irish border.
Major MAs such as the 200-day are tough levels to cross - usually - so for the DXY to break so easily above its 200-day MA the is a very bullish signal for the Dollar and bodes ill for Cable.
The reason major MAs present so much resistance is because they are popular indicators amongst both institutional and private investors and thus attract substantially more orders around their vicinity, which markedly changes the balance of supply and demand around them.
Thursday's Services PMI release could be a key event for Cable and the potential catalyst for more downside, especially after Manufacturing PMI disappointed to the downside on Tuesday and Services constitutes a much bigger sector.
"The key event for cable traders this week will be Thursday UK PMI Services report which is already approaching the 50 boom/bust level. If the data does not improve in UK's largest sector, chances of a rate hike are sure to drop and GBPUSD could test 1.3500 as a result," says Boris Schlossberg, managing director at BK Asset Management.
Yet equally of importance to the pair could be the impact of the meeting of the Federal Reserve this evening (Wednesday, May 2) as Fed officials are widely believed to adopt a more optimistic outlook for the economy, inflation and interest rates, with upside potential for USD if they do.
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