The selling pressure on the pound has not eased as we move into Thursday and the sell-off that started in July could be about to gather pace if GBPUSD fails to hold above support at 1.6664 – the 200-day sma.
If we get a daily close below this level then the technical and fundamental backdrop would both start to look grave for sterling.
The pound and the BOE
Although GBPUSD has fallen more than 3% in the past month, there could be further room on the downside, since the market is adjusting to a “new” environment for the pound, where the Bank of England may not be the first of the major central banks to hike rates.
GBP loses its yield effect
Since early rate hike expectations had helped to boost the pound, especially since the start of this year, the Bank of England’s decision to switch its focus to weak wage growth, after June wages fell for the first time since 2009, means that rate hike expectations could be pushed back, at the same time as expectations about rate hikes from the Fed are brought forward.
This has caused the UK –US yield spread to fall into negative territory for the first time since late April. If the yield spread sinks deeper into negative territory then it could weigh heavily on the pound going forward.
With momentum now decidedly bearish for the pound, key support levels to watch include:
- • 1.6664 – the 200-day sma.
- • 1.6556 – the April 4 low.
- • 1.6460 – the March 24 low.
- • 1.6284 – the 38.2% Fib retracement of the July 2013 – July 2014 bull trade.
Figure 1:
Source: FOREX.com and Bloomberg
Figure 2:
Source: PLEASE NOTE THAT THIS IS A BLOOMBERG CHART AND DOES NOT REPRESENT THE PRICES OFFERED BY FOREX.com
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