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British Pound To Swing Higher

Another breakout alert Forex peeps! But this time it’s for the British pound! Chart-wise, the Cable or the GBPUSD pair has recently broken out from a cup and handle continuation pattern. A cup and handle pattern, as the name suggests, takes the shape of a cup (a bowl-like price action) with a small handle to its left. The price would most likely head higher especially now that it is able to move past the 1.6000 resistance (where the cup’s rim or the neckline also lies). So judging by the height of the cup and projecting it from the point of breakout (1.6000), the pair could at least reach 1.6700.

On the fundamental side, the US’s Fed’s decision yesterday to buy an additional $600 billion of Treasuries until June of next year to improve the country’s labor market and to prevent deflation has weakened the greenback. While the Fed’s previous expansive monetary policy had helped save the US from having a second great depression, the economy’s recovery since then has noticeably been anemic. Jobless rate still remains at a high of 9.6% while inflation only rise by a pale 0.1% in September (1.1% year-over-year). These purchases, according to the central bank, should enhance economic growth through lower borrowing costs. Having a low interest rate or borrowing costs, of course, lessens the attractiveness of the USD compared to the other major currencies.

On the UK’s side, the Bank of England also had their monetary policy decision today. But unlike the US Federal Reserve, the BOE decided not to follow the move of its US counterpart to do another round of government debt-buying. Rather, it just kept its interest rate unchanged at 0.50% and its asset purchase facility at £200 billion ($324 billion). The BOE reasoned that the UK’s economic condition is at a better state compared to the US with the former having a relatively high inflation reading of 3.1% year-over-year in September. The move not to follow the Fed had investors buying up the Sterling pound in exchange for the greenback. Note that the recent CPI reading exceeds the market’s 3.0% consensus. Therefore, the combination of a possible BOE rate hike in the future due to inflation and the Fed’s move to make interest rates in the US closer to zero would make the pound more appealing than the greenback.

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