Earlier in London, sterling weakened to the dollar after a report showed that UK wages disappointed. Office for National Statistics reported that the Average Earnings Index comparing three months ending January 2015 with a year earlier, declined 1.8% from 2.1%. This big miss was also accompanied with dovish tones from the MPC that signal that the Bank of England is likely to keep rates on hold a while longer.
GBP/USD weakness continued in New York and found tentative support around the 1.4640 region. The daily chart shown above shows that bearishness may target the 1.4600 handle and form a bullish ABCD pattern. Point D is targeted with the 161.8% Fibonacci expansion of the B to C rally. The B to C rally is important because that rally was triggered by growing optimism that the BOE will tighten shortly behind the Fed as the UK job market appeared robust. While recent data and price moves appear to signal that bearishness is firmly in place, any dovishness from the Federal Reserve today could support a rebound this afternoon.
While, the UK economy continues to outperform many of the other advanced economies, today’s miss is not likely erase expectations that the BOE will be one of the first central banks to tighten. If at the end of today, price is trading below the 1.4580 level, downside may target the June 2010 low of 1.4344.
The trade: Buy GBP/USD 1.4605, with a stop loss at 1.4570 and take profit at 1.4675. The risk/reward ratio is 1:2
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading