Like most major currency pairs, GBPUSD has been essentially rangebound for the past six weeks. Over that period, we’ve seen our fair share of disappointing data from both countries, and neither currency has been able to rise above the economic mediocrity. On Friday, it seemed as if the pound was finally on the verge of a breakout above the key 1.50 level, but sellers stepped in late in the day to push the pair back down from that key resistance level for the weekly close.
Friday’s big reversal created an ominous Bearish Pin Candle*, or inverted hammer, on the daily chart, hinting that an important daily top may have formed. Bolstering the bearish case, the Stochastics indicator rolled over from overbought territory for the first time since late February. For the record, that previous top preceded a 900 pip drop down to nearly 1.4600, though that certainly doesn’t mean we’ll see the same outcome this time around.
On the fundamental side of the ledger, traders will zero in on tomorrow’s Bank of England minutes from the April 9th meeting. While the vote was likely 9-0 in favor of keeping monetary policy unchanged, there are some members of the Monetary Policy Committee who are in favor of hiking rates sooner rather than later. Like many central banks, the BOE must decide to what extent the current low inflation readings are due to temporary factors like the drop in oil prices vs. more stubborn, longer-term deflationary forces. If the minutes show that the balance of the MPC still favors the wait-and-see approach, cable bulls could opt to bail on their positions.
While GBPUSD is edging higher today, the medium-term bias will remain to the downside as long as rates stay below key psychological resistance at 1.50. To the downside, traders may target the Fibonacci retracements of last week’s rally at 1.4750 or 1.4670, the 61.8% and 78.6% retracements respectively (not shown). On the other hand, hints of a more hawkish BOE could lead to a bullish breakout and a potential squeeze up toward 1.5200 in short order.
*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken.