In the aftermath of the latest Bank of England Quarterly Inflation Report (QIR) released on Wednesday, the pound has breached an important technical level. GBPUSD has taken the hit after Mark Carney stuck to a dovish tone during his press conference on Wednesday, and this pair has passed through a key support level at 1.5770 – the low from 12th September 2013.
A bearish close for GBPUSD on Wednesday suggests that there is further downside to come, but how far can this pair fall?
A bleak fundamental picture:
Interestingly, the pound has tanked even though the BOE’s growth outlook for the UK remains strong. It was the inflation picture that seemed to excite the doves, after the BOE increased its expectation that inflation would fall below 1% sometime in the next 6 months. This has caused a flurry of re-shuffling of market rate expectations with the first rate hike now pushed out to Q3 2015, from late Q2 2015.
The risk is that the next QIR, which is released in February, will also revise down the BOE‘s inflation forecasts, especially if inflation falls below 1% sooner rather than later. Due to this, the October CPI print, which is released on 18th November, is the most important data point for GBP in the near term.
As usual, the market is pricing in the bleakest outlook, hence the precipitous fall for the pound in the last 24 hours.
So what does this mean for the pound?
Right now three things are weighing on GBP: the fundamentals, the technical picture and the resurgence in the dollar. These are powerful forces, and it could take a brave (or stupid) person to fight the trend lower in GBP at the moment.
The pound is the weakest performer in the G10, even the yen has managed to eke out a gain. Interestingly, GBPUSD has continued to rally even though the USD uptrend has taken a break, and the greenback has given up some recent gains versus the NZD and AUD, in particular. This highlights the lack of interest in the pound right now, which could weigh on cable in the medium-term. The question is how far could GBP fall? Key support levels to watch include 1.5430 – the low from 27th August last year, and then 1.50. At this stage, we don’t think that the pound will fall below this key psychological level.
GBPCHF: watch the 200-day sma
Cable isn’t the only cross that is struggling, GBPCHF has taken an enormous stumble since the QIR, falling through some major support levels including the 50-day sma and the 100-day sma, which is an extremely bearish development. The pace of this move is exciting the market, and if this GBP selling pressure continues then look out for a move back to 1.5075 – the 200-day sma in the near-term.
Takeaway:
Source: Bloomberg and FOREX.com. PLEASE NOTE THAT THIS CHART DOES NOT REPRESENT THE PRICES OFFERED BY FOREX.com.
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