Gaps in the spot forex market are quite rare so any such event tends to set the alarm bells ringing as the old trading maxim comes into play, “gaps get filled”. And indeed this has been the case for cable.
At the open on Sunday evening, cable gapped up to 1.6728 having closed on Friday at 1.6692. Yesterday’s price action was muted with only a narrow spread candle resulting from a quiet day’s trading, as the market waited for today’s inflation data. This duly arrived with lower than expected figures, with the headline CPI rate coming in at 1.6% against a forecast of 1.8%. However, whilst this surprised the market, when considered against the longer term trend for 2014, this is simply a continuation of the trend lower with January having opened at 2% and showing a steady decline thereafter, all helping to undermine talk from Governor Mark Carney of an imminent rise in interest rates. It is this factor which has helped to propel cable to this year’s high of 1.7191. In addition, UK producer price inflation (PPI) also fell in July, a factor which is also adding to the bearish tone for cable.
Moving to the September futures contract for GBP/USD, this too reflected the gap up move in the price action. In trading so far this morning, the pair has moved firmly through the potential platform of support at the 1.6660 area to currently trade (at time of writing on Globex) at 1.6631.
Moreover, yesterday’s attempt to rally, as well as last week’s, ran into the upper level of resistance now overhead in the 1.6750 region, which duly held. Moving forward, should today’s price action close below the support platform just breached, this will add further downside pressure to the pair.
This bearish tone is supported by the volume profile with the break below 1.6750 and the wide spread candle matched with high volume, validating the move. Equally, the rally of the last couple of days was accompanied by narrow spreads and falling volume, a classic sign of weakness. In the medium term, we can expect to see further downside pressure, possibly even as far as the 1.6450 region in the medium term.