Weak Economic Outlook Keeps Pressure on British Pound – GBP USD June... |
Forecasts of continued slowing growth in the U.K. kept pressure on the British Pound on Friday. While the U.S. Federal Reserve is ending its second quantitative easing program with no other stimulus plan in the works, speculation is abuzz the Bank of England is leaning toward keeping interest rates at a record low.
The recently released minutes from the BoE’s last meeting showed that members voted 7 – 2 to hold interest rates at the historically low 0.50% level. Some members are even suggesting that the weakening economy is calling for another round of quantitative easing. In the meantime, the market seems to be anticipating another round of bond purchases.
Another factor pressuring the British Pound is the current strength in the U.S. Dollar. Although Fed Chairman Bernanke acknowledged the U.S. economy was weak, he offered no insight into any new quantitative easing plans after letting the last program run its course at the end of June.
Technically, the GBP USD traded lower on Friday but inside of the previous day’s range. Typically this type of action indicates trader uncertainty and impending volatility. With a strong bias to the downside, this could mean sharply lower prices over the near-term or a temporary shift in sentiment.
Currently the GBP USD is trading inside of a major 50% to 61.8% retracement zone at 1.6045 to 1.5880. This range was created by the December 28 bottom at 1.5345 to the April 28 top at 1.6746.
Based on the daily swing chart, the main trend is down with the last main top at 1.6262 the price level that turns the main trend back to up. The recent string of lower-tops and lower-bottoms suggests that despite the clearly defined downtrend, the GBP USD is still susceptible to short-covering rallies. While this offers bearish traders a fresh chance to re-short at better price levels, it does serve to scare the weaker shorts out of the market.
Now that the market has reached a key retracement zone, it is possible that it is overdue for a short-term swing back up. Look for downside pressure to continue as long as the market remains under the 50% level at 1.6045. Regaining this price could trigger a short-covering rally. Continued downside pressure is likely to mean a near-term test of 1.5880. Bottom-pickers may trigger a short-covering rally from this level too; however, this rally is likely to be met with fresh selling pressure as long as the U.K. economy remains weak.
About the author: Forex Mansion Analyst - James Hyerczyk
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