The GBP/USD is starting the week with a bullish correction. This can be interpreted as a pullback after a bearish breakout last week from a multi-week consolidation pattern. That consolidation pattern by the way was a head and shoulders. Inn the middle of a downtrend , this pattern suggests bearish continuation because of the failed clear-out (the head) and the return to a lower high (the right shoulder).
The pullback from 1.4950 is now pushing at 1.51 and essentially testing whether GBP/USD-bears have gained control by keeping price lower than the average price from the first half of January. Essentially, a hold below 1.5150 should give the impression that bears are still in charge. But if that breaks, there is pressure to test the 1.52 high, then the 1.5270 high.
We can attribute part of this pullback to a slight decline in the USD during Monday, but the GBP/USD had an extra umph to its rally.
From a fundamental standpoint, we can attribute part of that umph to anticipation of today’s Preliminary GDP data for the 4th Quarter. The pound has been under pressure, and the growth rate is forecast to tick down again to 0.6% q/q.
UK GDP q/q (Q4 2014)
(click to enlarge; source: forexfactory.com)
As you can see, after picking up momentum in 2013, the GDP growth rate has waned during 2014 and if the BoE’s inflation and growth projections come true, there is still some downside ahead. If the US economy can hold its pace and the FOMC delivers on a rate hike, the GBP/USD also has more downside.
From across the pond, the FOMC will have a key meeting. Since the last meeting, a few things have developed.
1) Inflation declined.
2) Retail sales disappointed.
3) Employment data was okay, but wage growth was subdued.
4) ECB announced QE, BoE became more dovish, BoC surprised with a rate cut, and the SNB held an emergency meeting where it went to a negative libor rate and abandoned the euro cap.
The last one should surely shake things up. So the key question is how will the FOMC respond. It is expected to become a bit cautious, but will its language project a delay in the rate hike. If so, the USD might go into a period of correction, and the GBP/USD might go into a period of bullish correction.
Looking back at the 4H chart, see what happens to the 1.52-1.5270 resistance area. A break above this area after this week’s 2 key fundamental factors for cable should signal a bullish correction. If there is a pullback, a hold above 1.5150 should be a good sign that the GBP/USD is heading into a bullish correction.
If price ends up holding below 1.5150 at the end of the week, and the FOMC sounded optimistic about the US recovery despite recent events, then look for a bearish continuation going into next week.
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