Thursday’s trading session started off on an optimistic note for pound bulls. GBP/USD had rallied over 100 pips from Wednesday’s low under 1.5900, which happened to mark a potentially key long-term support level at the widely watched 61.8% Fibonacci retracement of the entire 2009-2014 rally. In addition to the bullish technical setup, the pair also got support from the fundamentals: UK January trade balance came out better than expected at just a GBP 8.4B deficit, while US retail sales were shockingly abysmal at -0.6% vs. an expected gain of 0.3% (though initial jobless claims did provide a bit of a silver lining by falling to 289k).
Unfortunately for GBP/USD bulls, the pair simply couldn't hold onto its overnight gains, despite the seemingly supportive technical and fundamental backdrop. When a currency pair fails to act as it’s “supposed to” by rallying on bullish fundamentals, it’s often a reliable sign that it is heading much lower. That perspective has gained further credence now that rates have broken below the late January low at 1.4950 to a new 20-month low under 1.4900.
From a longer-term view, the failed breakout above the shallow 23.6% Fibonacci retracement at 1.5480 two weeks ago is particularly concerning, as it shows bulls weren’t even able to recover a quarter of the big selloff from above 1.70 before relinquishing control back to the sellers. Meanwhile, the MACD indicator is trending lower beneath both its signal line and the “0” level, showing strongly bearish momentum, though the RSI indicator is peeking into oversold territory.
With Cable hitting a new low, the path of least resistance remains to the downside and previous support at 1.4950 may now provide resistance on any short-term bounces. To the downside, bears could now look to target the 5-year low at 1.4812, followed by the 127.2% and 161.8% Fibonacci extensions of the Jan-Feb bounce at 1.4785 and 1.4575.
As a final note, traders should keep a close eye on the rhetoric coming out of the BOE in the coming days. An underappreciated factor driving the pound lower has been the subtle shift away from rate-hike hints next year, highlighted by the normally hawkish MPC member Martin Weale’s comments that the recent fall in oil prices has provided “breathing space” for the central bank before it needs to hike rates.
Source: FOREX.com
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