Thanks to the Martin Luther King Jr. Day holiday, FX markets were quiet-ish on Monday without the participation of US banks, states Fawad Razaqzada of Trading Candles.

Volatility has started to pick up with reduced Fed rate cut bets boosting the US dollar across the board in the early European session on Tuesday. We are going to have some potentially market-moving macro data from around the world to look forward to later this week. Among these macro pointers, we will have some important UK data too, including CPI and retail sales, making the GBP/USD the currency pair of the week. 

What’s Next for the Pound?

On Tuesday, during the European session, the GBP/USD was about 70 pips worse off, dropping below 1.2650. Sterling was hurt by UK data showing earnings grew at a less-than-expected annual pace of 6.5% in the three months to November. As well as weaker UK earnings data reduced Fed rate cut bets were helping to boost the US dollar across the board. FX traders are expecting officials from the FOMC to push back against March rate cut expectations more forcefully after both CPI and jobs data for December were stronger.

Until Tuesday’s drop, concerns over the UK economy had been mostly ignored by FX traders. They had been happy to buy the GBP dips against all major currencies, especially the underperforming commodity dollars. But even against the US dollar, the pound has been able to hold its well. The GBP/USD has spent several weeks consolidating its sharp gains made at the back end of last year, holding just below the 1.28 resistance level for the most part. Let’s see if Tuesday’s drop will mark the end of that bullish trend or is going to be yet another trap for the bears.

The reason why the pound has remained supported despite macro worries in the UK is the fact that the Bank of England has remained in the hawkish camp relative to a growing number of other central banks that have recently turned dovish. The BoE’s relatively more hawkish stance is due to the comparatively higher inflation in the UK than in other major economies.

As a result, inflation data will be very important to watch this week but don’t forget that wages came in weaker, and this may encourage some MPC members to now opt for an earlier cut.

Looking Ahead to the Rest of the Week

As mentioned, we will have some more important UK data (CPI inflation and retail sales for December) coming up later this week, which should provide more clarity on potential interest rate cuts from the Bank of England. From the US, this week’s economic calendar highlights include retail sales and consumer confidence on Friday. Here are the key macro events relevant to the GBP/USD to watch this week:

chart

GBP/USD Technical Analysis

chart


The trend on the GBP/USD was bullish until today’s breakdown below the 21-day exponential average. Unless we now see a quick recovery during the US hours so that the cable ends the day with a hammer or another bullish-looking candle, there is now the potential we could see a deeper correction. Let’s see where the GBP/USD settles after the conclusion of today’s session.

The longer-term trend remains bullish given an upwardly sloping 200-day moving average and the fact price is holding well above it. But in light of today’s bearish price action, the bulls must wait until the short-term trend reverses again so that both the short-term and long-term trends are positive.

The first line of defense for the bears is seen around the 1.2690 - 1.2700 area, where the 21-day eMA meets prior resistance and support zone. Above here, the next resistance level comes in at 1.2800, which has been a tough nut to crack.

In terms of potential support levels to watch, the area around 1.2615 is now going to be important for the Bulls to defend. Failure to do so could pave the way for a drop to the 200-day MA at 1.2545.

To learn more about Fawad Razaqzada visit TradingCandles.com