GBP Basing For New Rally?

By: Richard_Cox

This year, we have seen a large amount of weakness and selling pressure that has been directed as the British Pound (GBP).  There have been a few different explanations for why this has been the case, as the policy trajectory is still largely unclear with respect to the stated policy stance exhibited by the Bank of England. 

Consumer inflation values have also been relatively subdued and this is something that tends to be a leading indicator for broader strength or weakness in the GBP.  But when we pair the currency against the US Dollar (USD) it is starting to look as though cable would be basing for a strong rally that would begin to unfold over the next month.  This outlook is supported by the fact that the Federal Reserve has elected to put its scheduled for raising interest rates on hold, and this is something that is likely to bring renewed strength to the rest of the currency majors.

Chart Outlook:  GBP/USD

Chart Source:  FiboGroup

In the chart above, we can see that the GBP is currently trading near a major level of long-term support.  Specifically, this support range comes in at the low 1.54s which is the prior low from June.  Candlestick activity is also showing evidence of a reversal as we are now seeing a bullish engulfing candle in the same price region.  From a projection standpoint, this puts the upside target for new long positions in GBP somewhere in the neighborhood of 1.5840 which is roughly 400 pips higher from here.

This creates a technical picture that clearly supports the bullish stance for the GBP going forward.  But there are additional factors that should be considered when establishing these types of positions.  Of primary importance is the fact that consumer inflation levels tend to spike in the UK toward the end of this year, and this could lead to renewed speculation that the Bank of England will be forced to revisit its own interest rate policy in the next few months. 

If this does occur, we should test the upper end of this year’s trading range and this would ultimately benefit those taking long positions at current levels.  All of this suggests that the GBP would actually be the darkhorse performer in the currency markets during the final months of this year.

By Richard Cox

© 2015 Richard Cox - All Rights Reserved

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