The Bank of England’s MPC meeting yesterday (Oct. 22nd) voted 7:2 against rate hikes. This was expected by the analysts and the same members, Weale and McCafferty, voted for a 0.25% hike as the last time. The rate stayed the same at 0.5%. Members voting against the rate hike were concerned about weak wage growth and couldn’t justify a rate hike in the current low inflationary environment. The UK Consumer Price Index (CPI) has been trending lower since October 2011 and is currently at 1.2, well below the BoE’s Q3 inflation expectations of 1.8%. This allows the Central Bank to have an ultra loose monetary policy without worrying excessively about price stability. Members of the committee were also concerned about a rate hike exposing UK to economical shocks and the slow down in the euro area being contagious. In light of recent weak data (low CPI and jobless claims for September falling less than expected), it may well be that those voting against rate hikes in the November meeting will have even stronger majority.
Today and tomorrow the focus will be on Friday’s Preliminary Gross Domestic Product (GDP) figure for the UK. This is the first release of the 3 versions of UK GDP. They are released a month apart – Preliminary, Second Estimate, and Final. The Preliminary release is the earliest and tends therefore to have the biggest impact on Pound Sterling.
The UK economy grew by 0.9% in the second quarter. Slightly beating expectations (0.8%) and was in line with Q1′s GDP reading of 0.8%. At that time, the IMF also upgraded its annual GDP forecasts for the U.K., which was then one of the better performers among the major economies. A weaker growth rate pace is projected for Q3, as manufacturing and services activity has slowed during the period. The analysts’ expectation for the Q3 GDP reading is 0.7%. A strong deviation (in either direction) from this figure is likely to translate into a stronger than average move in Pound Sterling pairs.
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GBPUSD, weekly: has been trending lower, now hovering at 50% Fibonacci retracement level (measured from July 2013 low to July 2014 high). Has bounced from proximity of weekly support at 1.5855. Weekly support: 1.5855 – 1.5875 and weekly resistance 1.6252 coincides with 38.2% Fibonacci level. Stochastic oscillator is oversold but showing some bullish divergence (Stochastics has moved higher while price has moved lower). This suggests to me that the downside is limited as the market is turning and probabilities are on the long side once the intra-day charts signal the timing for longs is correct. Weekly and daily pictures give us the frame work and an understanding of what kind of process the price is going through. Intra-day charts provide us with timing tools.
GBPUSD, daily: This weeks high (1.6185) coincided with a Fibonacci cluster 1.6170 – 1.6197. These clustering levels are measured from the highs in the down move to the latest low. The fact that several Fibonacci levels and a weekly high coincide at same levels emphasizes the importance of, not only Fibonacci cluster analysis but also the level as a resistance. Another cluster above this one is at 1.6250 – 1.6274, a level where the Bollinger Bands are at the moment as well. Supporting Fibonacci cluster (blue lines) is roughly at the same level with the always so important 50% retracement (measured from July 2013 low to July 2014 high). In addition, the pair has just broken out of bullish wedge formation three days ago and has now retraced to the trendline that used to limit its move higher. This too is a sign to look for long opportunities in shorter time frame charts.
GBPUSD The most interesting area to consider long trades is the potential support area (1.5940 – 1.5965) provided by the daily Bollinger Bands and the October 16th low. At the time of writing, price is still creating lower lows and highs and seems to be edging lower. This might well be due to the uncertainty caused by the coming GDP update on Friday. If there will be no major negative surprise (the UK GDP figure is close to expectations) the above mentioned support levels could provide day trading opportunities with the 21st October low being the first target. Above that potential target levels would be 1.6180 and 1.6220.
Conclusion: Based on the above analysis GBPUSD is currently at levels that favour long trades. We have a market that is close to a support after long move lower, and it is showing signs of momentum change: bullish wedge and breakout with a divergence in Stochastics. The downside seems to be limited as downside momentum is waning and probabilities are therefore on the long side. We should keep in mind though that intra-day signals should be closely monitored in order to increase chances to get the timing for longs right. In addition, it is unlikely that this market will make major moves before the preliminary GDP publication tomorrow. If there is no intra day momentum reversal signal and the price keeps on moving lower, this setup is negated and traders should act accordingly.