This is an important week for the British pound and we can see the market full of anticipation for the Bank of England’s (BoE) quarterly inflation report to be released on Wednesday (5/13). The anticipation has been positive, meaning the market seems to expect the BoE to have an optimistic view of inflation despite the 0.0% annual CPI inflation print for March. Low inflation has been keeping the door open for a rate cut, but if the BoE expects inflation to return to target in 2016, it might shut that door. The shift away from a dovish stance would essentially be a relatively hawkish stance, and thus the pound has been gaining against the USD. While the recent weakness in the greenback can explain GBP/USD’s recent rallies since April, the extension this week is mainly due to the anticipation of the inflation report.
The daily GBP/USD chart shows a bullish reversal in action after the pair made a low on the year at 1.4564. Last week price bounced off the 100- and 50-day SMAs and respected a price bottom and a key broken trendline as support. As we get into the 5/12 US session, price has broken the 200-day SMA and made a new high on the year. GBP/USD has an uptrend that looks poised to reach 1.60, but first there is a support/resistance pivot area in the 1.58-1.5825 area that harbor some sellers.
When we look at the 4H chart, we can see a key pivot around 1.53. If price breaks below 1.53, it will start losing its bullish bias, especially if GBP/USD falls below the rising trendline while the 4H RSI falls below 40. This does not necessarily revive the bearish trend in the medium-term, but it opens up a test of the 1.50 handle, which might be the last line of defense for the bullish scenario.
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