The British Pound which has been trading considerably weaker since mid last year was poised to the downside heading into the UK elections that concluded last week on May 7th. Economists and analysts alike were unanimous in expecting to see a weaker Pound Sterling on the UK elections, attributing this to the fact that with the rise of a number of new parties, the probability of a clear victory to a single political party was unlikely and that the uncertainty post election alliance talks would weigh in on the Pound.
But, boy the outcome of the 2015 UK General elections was totally different and one that probably had the lowest odds. As a majority of the average UK citizens voted for the Tories, giving them a clear majority and a second term for incumbent David Cameron, the British Pound reacted by rallying overnight as exit polls started to point to the Tories gaining a lead.
On the May 8th morning, the British Pound managed to hold its ground across the board albeit slipping briefly but overall staged an impressive comeback regardless. Needless to say, the British Pound closed in the positive for the week across the board.
Heading into the election week, the British Pound was in fact quite resilient. Firstly, the currency ignored the weaker Q1 advance GDP estimates, which sharply slowed down, rising a mere 0.3%in the first quarter of 2015, from 0.6% in Q4, 2014, marking the slowest pace of growth in three years.
In regards to the BoE interest rate speculation, the market currently estimates the UK Central Bank to raise rates in Q1 of 2016. However, with prices of WTI Crude Oil stabilizing across the board and lifting off from the lows near $40, it would only be a matter of a few months before inflation starts to pick up across the board.
Of immediate risk to the currency is this week’s BoE’s interest rate decision. While it is expected to be a no-show, the fact that future BoE monetary policy decisions could turn hawkish is something worth considering.
GBPUSD – From a falling wedge to a potential Inverted Head and Shoulders?
The daily chart timeframe for GBPUSD shows a break out from the falling wedge beneath the falling trend line. The break out level at 1.51134 saw a quick retest before prices rallied towards the falling wedge’s measure move price objective of 1.55275 with Friday’s price action shooting up with a gap up from Thursday’s close.
While price is a few pips shy of 1.55275, it will be interesting to watch of price unfolds at this price level, considering the fact that it marks a previous resistance level. A break above 1.55275 is most likely to turn GBPUSD very bullish in the medium term, while a break below 1.51134 is needed to shift the bias back to the bearish sentiment.
GBPUSD, Daily Chart (11/05/2015) – Falling Wedge
The price point at 1.55275 is of importance as it also marks a potential neckline of what seems to be an inverted head and shoulders pattern in the making. Although readers should note that we stress on the word ‘potential’ as the pattern is not yet complete. So far, we do see a left shoulder and the inverted head pattern being formed, while the right shoulder seems to be a bit weak in its formation. Nonetheless, a break above 1.55275 will be one to watch as it could mark a possible new leg to the rally.
The inverted head and shoulders pattern (IHS) gives an upside minimum price target to 1.592 (or perhaps to 1.6 round number). Watch for a possible break and retest to 1.55275 or a few pips above this level in order for the IHS to be validated. Adding further conviction to this view is the break out from the falling price channel, which typically see’s a corrective rally to the upside.
GBPUSD, Potential Inverted Head and Shoulders pattern
Overall, looking forward from a fundamental point of view, the main election risks is done with and the focus for the British Pound will be the BoE’s interest rate hike forward guidance and of course, the US Dollar, which has in recent weeks entered into a holding or consolidation pattern. While the possibility of a June rate hike seems to be dissipating, a hike in September is still on the cards. So far economic data in the first quarter is indeed pointing to a contraction and in this aspect, markets will be closely scrutinizing the Q2 data which if fails to see a rebound in economic activity in the US could potentially pour cold water to the Fed’s plans for a rate hike. This in turn would definitely see the GBPUSD eye higher ground in the next few months.
