Early in London, the British pound rallied 85 pips to 1.5249 against the dollar after the UK Services PMI reading increased to 57.2 in January. Market consensus called for a more moderate advance. Both activity and new business had impressive gains as employment had one of the best gains since 1998. Optimism is growing in England and that may be enough to support a stronger short-term advance with sterling.
The GBP/USD daily chart shows that price made a key bottom with the 1.4950 low made on January 23rd. Price is tentatively respecting a double-top pattern which was formed just below the key 1.5250 level. If sterling strength returns, upside momentum may target a run towards 1.5402, which is also where the 50-day SMA area is trading. It is also around that area that a bearish butterfly pattern may form. If price does have a daily close above the bearish trendline extending back to the July 15th high, we could see one last thrust higher before the bearish trend returns.
If downward momentum returns immediately, price should be able to recapture the 1.50 handle and target the 1.4800 region. Deeper support might come from the 1.45-1.4550 zone.
The trade: Buy GBP/USD at 1.5200 with a stop loss at 1.5125 and a take profit at 1.5400. The Risk/Reward Ratio is just under 1:3.
Edward J. Moya
WorldWideMarkets Online Trading