GBP/USD crashed by the BoE
By Kira Iukhtenko
The cable had another bearish week, plummeting below $1.6700 on weak UK wage growth and dovish BOE Quarterly Inflation report. Even as the employment increased and unemployment declined, the average weekly earnings fell by 0.2% y/y – this was the first negative reading in 5 years. The Bank of England slashed its 2014 wage growth forecast from +2.5% to 1.25%, dampening the rate hike expectations in the year 2014. Real wage growth is lagging far behind the inflation, limiting the household consumption. Investors are now aggressively building short positions for GBP. Given the shift in BOE comments, it seems now difficult to find reasons to buy GBP/USD.
The technical picture for GBP/USD is clearly bearish. Break below $1.6700 confirmed a top formation at $1.7190 (6-year high hit in mid-July). The cable is testing the 200-day MA ($1.6650) to the downside as we speak. By the way, this is the 200-month MA. The daily Ichimoku is giving out selling signals. In our view, a break below $1.6650 will open the way to the $1.6300 area (38.2% Fibonacci from the 2013-14 rally). However, we have to admit that the pair is oversold these days. Resistance lies at $1.6800 and $1.6880 (20-week MA, former support).
Next week will also be eventful for the sterling. Watch the July inflation data on Tuesday. In June CPI increased by 1.9%, almost reaching the BOE 2% target. If consumer prices growth slows, selling pressure on GBP will increase. On Wednesday the BOE will release its meeting minutes from the August 7 meeting. We’ll see if there were any changes in votes inside of the MPC. On Thursday July retail sales and public sector net borrowing are on the schedule.