The pound had been the mighty currency in the G10 for most of the last 10 months; however it is starting to look decidedly mediocre. Its performance vs. the USD was middle of the road last May and after a torrid performance of late, GBP/USD is only 1.13% higher since the start of the year.
So could the pound be ready to turn a corner? The fundamental picture still remains fairly supportive – the BOE is still likely to be the first of the major central banks to hike rates and the economic data remains solid, even though there are signs of moderation, particularly in the housing sector. But from a market perspective, a lot of the good economic news is already priced in.
External fundamental events could also hurt the pound this week: firstly, if the market decides to sell the EUR on the rumour of ECB action this week, and then buy the fact. EUR/USD has fallen some 400 points ahead of the ECB meeting. Even if the bank does cut benchmark and deposit rates as expected, this may not be enough to sustain the downtrend, which could boost EUR/GBP.
Secondly, the immediate outlook for the dollar remains strong after the dollar index closed last week above the 200-day sma. A strong payrolls report later this week could also boost the greenback at the expense of sterling.
The technical perspective is also fairly downbeat for the pound
- The break below the 50-day sma at 1.6774 also suggests that short-term price action will be lower.
- GBPUSD broke a long-term trend line last week, after it fell below 1.6805.
- GBPUSD is testing the top of the daily Ichimoku cloud at 1.6724. A break below this level is the end of the technical downtrend and could point to further losses.
- A bearish crossover on the daily MACD suggests that momentum could be to the downside.
- A close below 1.6665 – the 61.8% Fib retracement of the March – May advance would be a negative development that could confirm a bearish trend, and may open the door to the March lows at 1.6460
- Worth noting: When a currency pair breaks its uptrend some expect a downtrend to play out straight away. That is often not the case; instead a break of a major trend line can trigger a period of consolidation. Thus, even if we do close below the daily Ichimoku cloud top, it does not mean that GBPUSD will fall to 1.6460 – the March lows – immediately. Instead, it may take some time before the downtrend entrenches itself.
Takeaway:
- The good economic news and the potential for the BOE to be the first of the major central banks to hike rates, seems to be priced into the pound already.
- A rebound in the EUR after the ECB meeting and a good US payrolls number could weigh on GBP.
- The technical picture is turning bearish for the pound.
- A break below the daily cloud top at 1.6724, then 1.6665 – the 61.8% Fib retracement of the March – May advance, could signal further declines.
- A downtrend in GBPUSD could take some time to formalise, as usually a period of consolidation immediately follows the end of a trend.
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