Earlier in London, the British pound rallied against its major trading partners after the Bank of England kept rates unanimously unchanged but highlighted rising inflation risks. The initial reaction saw GBP/USD spike 24 pips to 1.5645 but then immediately drop towards the 1.5600 handle before rallying towards the 1.5630 area.
Today’s rate decision may have been a key turning point with voting members as they could have turned decidedly more hawkish. If inflation rises over the next couple of months, we could see the BOE raise rates for the first time in eight years.
Price action on the GBP/USD daily chart shows that price is tentatively bouncing higher off the 50-day SMA. Since making a significant low on April 13th at 1.4564, price has steadily made higher lows and higher highs. This bullish indication is also supported with price trading comfortably above the 200- and 100-day SMA. If we see a breakout above the 1.5700 zone, further upside could target the 1.6080 – 1.6250 region. It is around that area that we could see a bearish butterfly and ABCD pattern form.
With the U.S. dollar long overdue for a correction, we may only see a short-term rise with this currency pair. If we see a major drop with sterling, deeper support could target the 1.5285 level.
The trade: Buy GBP/USD 1.5650, with a stop loss at 1.5550 and take profit at 1.6050. The risk/reward ratio is 1:4
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading