The Wounded Pound is Rising Again

Today the pound faces the BOE’s interest rate decision, inflation report, and MPC meeting minutes at 11:00 GMT, followed by a press conference with Mr. Mark Carney 30 minutes later. The BOE is expected to reduce the rate by 25 basis points.

At the moment, it looks like market players are not concerned about lower rates in the UK, and other risks to the region, as we see buyers keeping the pound’s head up for now. On Tuesday, the pound gained about 182 pips against the USD, closing near the highs of the day.

I expect the pound to keep rising over the near term. If the BOE disappoints today, and perhaps keep rates unchanged, we would probably see an aggressive strengthening of the pound. However, the BOE will probably act conservatively and ease further, considering the risks that the Brexit poses to the UK economy. The question is just how the market will react to a rate cut if there is one. Perhaps we could see the same reaction that we saw with the AUD on Tuesday when the Aussie briefly dipped after the rate cut, and then ripped higher. Of course, the rate decision is not the only factor to keep an eye on today. The press conference could be a real market mover in itself. If the BOE seems less dovish than what the market expects, this could further boost the pound. Anything is possible however, and traders should be careful of choppy market behavior. Let’s look at the GBP/USD:

GBP/USD

GBP/USD Monthly Chart

 

When we look at a monthly chart of the GBP/USD, we notice that a hammer candle formed in July. This could possibly be a sign that the pair has struck a support zone from which we could see a bounce. Certainly, there are many economic risks threatening the UK economy at the moment. But on the other hand, did market players perhaps overreact to the Brexit event? Maybe the pound is a bit undervalued at the moment? It is difficult to say. Here is a daily chart:

GBP/USD Daily Chart

 

Yesterday the pair traded down and almost touched the 20 EMA before it recovered about 45 pips. It looks like the 20 EMA, which has resisted price several times in the last month, might be turning into support. It is important to note that technically the GBP/USD is still in a downtrend and that traders looking to enter long ought to be careful. The technical pattern I see is a ‘bear flag’ which suggests that price might decline further. Look at the weekly chart below:

GBP/USD Weekly Chart

 

Trading the pound at the moment is not easy. In the hourly chart below we can see that the short term momentum is bullish on the GBP/USD:

 

GBP/USD Hourly Chart

 

Perhaps shorter term traders might ‘pull in some pips by buying the dips’.

It is important to note that we have Non-farm payrolls data out of the US tomorrow, which is one of the most anticipated economic news events in FX. This might have an effect on market participation today, as the uncertainty of tomorrow’s event might keep certain investors from taking on large speculative positions before the data release tomorrow.

Though the fundamental picture of the GBP/USD is a bit muddy, I like the fact that Tuesday’s trading volume on this pair was above average. High trading volume sometimes indicates the most probable direction of an instrument. This means that the GBP/USD might trade a bit higher, as Tuesday was a strong bullish day.

Other news and pairs

Besides the news out of the UK, there is also important economic data out of Australia early this morning at 01:30 GMT – the retail sales figures. There are also some light data releases out of the US later in the day. However, these will almost certainly be overshadowed by the more important Non-farm payrolls tomorrow.  

USD/CHF

The USD performed pretty well against the Swiss Franc yesterday and basically engulfed the bearish price action of Tuesday. Price action on the daily and weekly charts are pretty sideways, though, and may attract range traders.

USD/CHF Daily Chart

 

EUR/USD

The Euro was also slammed by the USD yesterday, with the price also basically engulfing Tuesday’s bullish candle. See the chart below:

EUR/USD Daily Chart

 

Price is also caught in a large range for this pair, especially when looking at a weekly chart:

EUR/USD Weekly Chart

 

Range traders may also be interested in trading this pair.

Have a great trading day!