The British Pound Is About To Trick Investors

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Includes: DGBP, FXB, GBB, UDN, UGBP, USDU, UUP
by: Sandeep Singh Ahluwalia
Summary

On the news front, retail sales excelled on both sides of the pond.

From April 2018, the British pound has lost 8.18% of its value against the US dollar.

The British pound shall rise this week after which it shall commence a fresh descent.

GBP/USD Price Descent From April 2018, the sterling has been in a bearish phase which has resulted in it losing 8.18% of its value against the US dollar. But now, I believe the sterling shall have a temporary recovery this week after which it shall recommence its descent. For me to illustrate this in detail, I shall delve into the latest fundamental news affecting the pair whilst also sneaking a peek at the technical side.

Fundamental news:

  • Retail Sales Data:
    • British retail sales in May rose by 1.3%, thus crushing the estimated growth rate of 0.5%. Moreover, the core retail sales for May rose by 1.3% against a projected rise of 0.3%.
    • On the American front, the US core retail sales for May rose by 0.9%, hence bypassing the estimated level of 0.5%. Moreover, this is the strongest gain seen since November 2017. Furthermore, the US retail sales for May rose by 0.8% which surpassed analysts’ estimates as they had it pegged at 0.4%.
  • US employment data:
    • The US employment statistics show that the number of unemployment claims has dropped to 218,000. This is below the estimate of 223,000.
  • Interest rate hike:
    • The FX market had priced in an interest rate hike and the Federal Reserve did not disappoint as it increased the rates by a quarter point. Therefore, the rates now range between 1.75% and 2%.

Technical analysis:

Daily Chart:

GBP/USD Daily Chart The pair’s daily chart indicates that in the coming week, the sterling shall be having a bullish turnaround due to the formation of a hammer pattern. The pattern psychology indicates to investors that after the last burst of selling, new buying has commenced. Moreover, this candle pattern shows how the sterling is rejecting the lower prices, thus indicating a clear change in the balance between bears and bulls. The net result of this is the lessening of the bears’ confidence in sustaining the lower price levels. Moreover, the current candle has taken support from the 78.6% Fibonacci level at 1.3216.

Nevertheless, I do not expect sterling’s bullish run to extend beyond the 127.2% Fibonacci resistance level at 1.3554. This is due to this level being a tried and tested resistance zone. Moreover, the 100% Fibonacci resistance level is at 1.3481.

On the indicator facet, the short-term RSI is steeply ascending and has just broken above the 30-mark. This indicates that the bullish run shall continue to the 127.2% level mentioned above.

Weekly Chart:

GBP/USD Weekly Chart The pair’s weekly chart indicates that the sterling shall have a bearish continuation in the long run due to the formation of a bear sash pattern. This pattern indicates that the tide of the pair has changed from one in which the bulls were temporarily in control, to one where the bears are now calling the shots. I say that as the sterling traded bullishly for two weeks after which the bears regained the reins with the current candle pattern. Moreover, the short-term exponential moving averages have fallen below the 50-day MA which is acting as a resistance line. Lastly, the 20-day MA is in steep decline.

On the support front, the sterling has currently taken support from the 23.6% level at 1.3191. The support level I expect the sterling to tumble till is the 61.8% level at 1.2732. But, if the fall does not culminate at this level, then the British pound shall plunge to the 100% support level at 1.2274.

The Big Picture:

In conclusion, I am leaning towards the bears being in the driver’s seat for the long term. However, in the coming week, I do expect an incline that will make investors enter the trade only to realise it’s a long-term trap. This notion of mine is fuelled by the fact that the technicals and fundamentals support a descent. However, whichever way you decide to trade, do ensure that you utilise trailing stops, as this shall aid in capital preservation which is of prime importance.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.