Will The British Pound Recover Against The U.S. Dollar?

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

UK’s inflation level in August ascended to 2.7% on a yearly basis, which surpassed the market estimate of 2.4%.

The Bank of England hiked the bank rate from 0.5% to 0.75%.

The U.S current account deficit for the second quarter of 2018 fell to $101.5 billion from a prior value of $121.7 billion in the first the quarter of 2018.

The technical picture for the British Pound looks bleak, all thanks to a Bearish Engulfing candle pattern.

From mid-August, the British Pound (FXB) has been in a bullish phase, which has resulted in it ascending by 6% against the U.S. Dollar (UUP). However, I now believe that the British Pound shall be having a bearish reversal which will result in it tumbling till the 1.2907 mark. 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 affecting the pair

UK Inflation levels

The UK’s inflation level in August ascended to 2.7% on a yearly basis, which surpassed the market estimate of 2.4%. Moreover, the core inflation level in August rose to 2.1% on a yearly basis, which also surpassed the estimate of 1.8%. Furthermore, we see that prices of numerous recreational goods and services have made the largest upward contribution to the monthly change in inflation levels for August. Lastly, this year transportation prices have been the largest contributor to inflation levels as they have risen by 6% on a year-on-year basis.

UK interest rates

The Bank of England at the beginning of August hiked the bank rate from 0.5% to 0.75%. This hike was done so as to counter external cost pressures that were a result of the Pound’s past depreciation and Britain’s rising energy prices. During the prior five bank rate releases, the GBP/USD has risen on average by ten pips in fifteen minutes after the data was released and by thirty pips in the subsequent four hours. However, this release had no surprise as the GBP/USD pair showed no significant movement from the news.

Brexit

All was going well for the British Pound up until the Salzburg summit. I say that as the downward trajectory of the British Pound commenced after Britain and the European Union failed to find common ground on the custom unions issue and the Irish hard border dispute. This resulted in the EU rejecting the British Chequers proposal outright. Moreover, the President of the European Council Donald Tusk stated that the United Kingdom wanted to "eat the cake and leave it whole." Furthermore, the British press aggravated the situation by labelling Theresa May’s defeat as an humiliation. However, the last nail in Sterling’s coffin was put by its own Prime Minister. I say that as the Prime Minister in a special televised address at Number 10 stated that she always treated the EU with respect and that she expected the same. She then stated that she shall not permit the European Union to "tear Northern Ireland away" from the United Kingdom. These words sparked the Sterling’s bearish reversal as right after her statement, the Pound fell below the 1.3100 mark.

U.S. Current Account

The U.S current account deficit for the second quarter of 2018 fell to $101.5 billion from a prior value of $121.7 billion in the first the quarter of 2018. The $20.3 billion deficit reduction was primarily due to a decrease of $17.6 billion seen in the deficit of goods. Moreover, exports of goods and services and income receipts in the second quarter rose to $933.3 billion, which was an increase of $28 billion. This news greatly helps the U.S. Dollar in bolstering its bullish position against the British Pound.

Technical analysis

Daily ChartGBP/USD Daily Chart The pair’s daily chart indicates that the Sterling shall be having a bearish reversal, which shall result in the Pound’s value tumbling against the U.S. Dollar in the coming days. I expect this due to the formation of a ‘Bearish Engulfing’ candle pattern. The pattern’s psychology indicates to traders that the bears have wrestled control of the market from the bulls. Moreover, the bearish engulfing pattern received further confirmation as it formed at the 127.2% resistance level at 1.3271.

On the price target front, I expect the British Pound to tumble till the 161.8% support level at 1.2907. Moreover, this support level is also a former change of polarity zone. However, if it does breach this level, then the next key support level is at 1.2822.

On the indicator facet, the RSI has just descended below the 40 mark, thus, supporting the notion that the Sterling shall have a downwards movement. Moreover, the ADX has turned steeply downwards, hence, clearly suggesting that the bullish trend has stalled.

Weekly Chart

GBP/USD Weekly Chart The pair’s weekly chart indicates that the bullish rally has stalled. The reason I say this is due to the U.S. Dollar reaching the 127.2% fibonacci resistance level at 1.3271. Moreover, the pair has formed a ‘Gravestone Doji’ candle pattern at this resistance level. The long upper shadow of the pattern indicates to traders that the bullish advance has been stopped by the bears.

Furthermore, the RSI of the weekly chart has also tilted in favour of the bears as it has commenced a descent. This clearly supports the notion that the British Pound is all set for a decline till the 161.8% support level at 1.2907.

The Big Picture

Overall, I am leaning towards the bears pushing the value of the Sterling to the 1.2907 mark. This is driven by the fact that the technicals and fundamentals fully support a descent in the currency's value till that point. However, whichever way you decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation.

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.