GBP/USD: Stormy Clouds Over Westminster In The Long Term

by: Sandeep Singh Ahluwalia

The trinity of the key UK economic indicators were released last week and they weren’t a ray of sunshine.

Federal Reserve chair Jerome Powell stated that he is satisfied with the US economy's GDP growth levels.

Sterling’s momentum has temporarily shifted to bullish. However, in the long term the trend is still bearish.

From April 2018, the British pound has lost 10% of its value against the US dollar.

From April 2018, sterling has been in a downward phase which has resulted in it losing 10% of its value against the US dollar. But now I believe sterling shall have a short-lived recovery in the coming two weeks, 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:

  • British labour market report:
    • The British labour market report for June was released mid last week and was largely negative. Wage growth levels stood at 2.5% which was a drop from the prior month’s rate of 2.6%.
    • The UK claimant count rose to 780,000 after a prior drop of 300,000 in May. However, the unemployment rate remained stagnant at 4.2% which is the same as analysts’ had anticipated.
  • British Inflation and sales levels:
    • The British consumer price index remained stagnant at 2.4% against an anticipated level of 2.6%. However, the core inflation level after ridding the consumer basket of food and energy prices stood to 1.9% against an anticipated level of 2.2%.
    • The total UK retail sales fell to -0.5% in June against a prior level 1.4% in May. This statistic missed analysts’ estimates as they had anticipated growth of 0.1%. On the other hand, core retail sales excluding motor fuel sales fell to -0.6% against a prior level of 1.4% in May.
  • US Economy:
    • Federal Reserve chair Jerome Powell issued a crystal-clear message about the US economy. He stated that he is satisfied with GDP growth levels and is also pleased with the accelerated wage growth. However, he believes that the high tariffs will negatively impact the US economy in the future.

Technical Analysis:

Daily Chart:

GBP/USD Daily Chart The pair’s daily chart indicates that in the coming week sterling shall have a bullish turnaround due to the formation of a bullish engulfing pattern. This pattern psychology indicates to investors that bears are now losing momentum whilst bulls are gradually gaining the upper hand. Moreover, the candle has taken support from the 161.8% Fibonacci level at 1.2995.

On the price target front, I do not expect sterling to extend its rise beyond the 100% resistance level at 1.3284. This is due to this level being a tried and tested resistance zone. However, if it does manage to breach the 100% level then I do not expect an increase above the 127.2% level at 1.3370.

On the indicator facet, the short-term RSI is steeply ascending and has just broken above the 50-mark. This indicates that the bullish run shall continue to the 100% level mentioned above.

Weekly Chart:

GBP/USD Weekly Chart The pair’s weekly chart indicates that sterling shall have a bearish continuation in the long run due to the formation of two bearish candles at the 100% support level. However, I expect sterling to fall in the long term as this support level has been broken numerous time. Thus, I expect sterling to fall between the 127.2% and 161.8% levels. The 127.2% level is at 1.2840 whilst the 161.8% level is at 1.2699. Moreover, the exponential moving averages have fallen below the 50-day MA and are now acting as resistance lines. Lastly, the 20 and 200-day MA are in steep decline.

The big picture:

In conclusion, I am leaning towards the bears being in the driver’s seat for the long haul. However, for the coming two weeks, I expect a rise in sterling’s value. 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.

Sandeep Singh Ahluwalia

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.