GBP/USD: Stormy Clouds Over Westminster

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

The sterling fell to the predicted level of my prior article.

The British pound is at a critical crossroad.

The level of uncertainty surrounding the Brexit issue will help infuse some bullish energy into the greenback.

In my last article on January 3rd, I had highlighted that the pattern the British pound (FXB) was trading in was risky. I said this because I expected the currency to have a decline if the level of Brexit uncertainty were to rise further. This fear of mine proved to be true as the sterling had a downside breakout which resulted in it falling till the support level at 1.249. However, I believe the currency's descent has now come to an end as I expect the British pound to trade in a sideways pattern in the coming days. Hence, to establish the likelihood of this occurring, I will look at the fundamental news affecting the currency, while also analyzing the chart using technical analysis tools.

Fundamental news:

British macroeconomic data:

One of the reasons I expect a sideways pattern in sterling's value is due to the latest British macroeconomic data. The Manufacturing Purchasing Managers Index rose to 55.1 in March, which surpassed the analyst estimate of 51.2. Moreover, the GDP level met analyst expectations as it came in at 0.2%, which is the same as the analyst forecast. Hence, due to all the macroeconomic data being neutral or positive, I expect a sideways pattern to form in the currency.

American statistics:

The latest U.S. statistics have been negative. Retail sales fell by 0.2% in February after an increase of 0.7% in January. Moreover, the core retail sales value fell by 0.4% which is a steep decline from the prior month's increase of 1.4%. Hence, I believe these two statistics will place a great deal of bearish pressure on the greenback. This, in turn, will provide the sterling with some much-needed support.

Brexit:

I believe the high level of confusion created by Brexit in the United Kingdom will significantly benefit the U.S. dollar. I say this because I expect cash inflows into the United Kingdom to reduce further as any savvy investor will not want to put their hard-earned money into a currency that will most likely devalue in the long term. Thus, due to this risk, I expect cash inflows into the United States to rise which will give the U.S. dollar a shove in the right direction. This is because the U.S. dollar is a safe-haven currency.

Technical analysis:

Daily chart:

GBP/USD Daily Chart

The pair's daily chart indicates that the currency is at a crossroad as the candle signals suggest that the trend is neutral. I say this because the current candle pattern is a combination of an 'Inside Day' candle and a 'Shooting Star' candle. The Inside Day candle pattern signals to investors that a bull run will be occurring. However, the bullishness is canceled out as the prior candle is a Shooting Star which indicates to investors that an upturn may occur but will not be very profitable. This is because the currency will only be able to rise till the top wick of the Shooting Star. Thus, due to this, I expect sterling to form a sideways pattern.

On the price target front, I expect the upper line of the box range to be at the 50% Fibonacci resistance level at 1.3147. However, if it does breach this level, then I do not expect the box range formation to go above the 61.8% Fibonacci resistance level at 1.3191. Moreover, for the support I expect the box range to utilize the range between the 100% and 127.2% Fibonacci support levels. The 100% Fibonacci support level is at 1.2986, while the 127.2% Fibonacci support level is at 1.2882.

On the indicator facet, the RSI is extremely oversold as the short-term RSI value has reached the 13-mark. Thus, this clearly shows that the currency is all set for a sideways pattern in the coming days.

The big picture:

Overall, I am leaning towards the bulls and bears having a tug of war which will result in the British pound trading in a sideways pattern. This is because the technicals support a sideways formation in the currency. However, whichever way you do decide to trade, make sure you utilize trailing stops, as this will 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.