Long-term prospects of GBP/USD

By Kira Iukhtenko, FBS

Despite the strong bullish momentum on the previous week, the $1.70 resistance remains a hard nut to crack for the GBP/USD buyers. The pair spiked at $1.7010 on Monday before returning back below the $1.70 hurdle.

UK released lower-than-expected inflation figures today, but the market refused to use the news as a reason for a strong selloff. The pair dipped to $1.6930, but recovered rather quickly. US inflation, on the contrary, came out a bit better than expected, but also was not a market-changing event.

The long-term bullish prospects of the cable are still doubtful, but the GBP looks supported these days. The reason for that lies in the last week’s shift in the BoE official message: Governor Carney was as direct as possible, saying the rate hike could happen “sooner than markets currently expect”. As a result, expectations of a Q4 2014 (November probably) rate hike increased notably.

The Bank of England will release MPC meeting minutes on Wednesday at 8:30 GMT. If the minutes indicate that the rate hike was discussed, the pair will find itself above $1.70 tomorrow.

We now need to see a decisive shift in the US monetary policy to pull GBP/USD down. The Fed will hold its policy meeting on Wednesday and release the economic projections (18:00 GMT). The US regulator will likely taper the QE program by another $10 billion this month, but it seems to be pretty far from raising the interest rates. FOMC economic forecasts could be revised down, giving additional support to the cable.

Weekly close above the $1.7040/50 area will pave the way for a test of the $1.7320 mark in the coming weeks. This is 50% Fibonacci retracement from the 2007 decline – another strong resistance. We recommend using dips for buying the pair these days. The market could form a “double top” pattern, but the market is too far from confirming a reversal these days. Bullish scenario will be negated below $1.6700.


Chart. Montly GBP/USD


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