The GBP USD finished the week on the downside after an attempt to breakout over a weekly swing top at 1.6165 failed. A downtrending Gann angle from the 1.6618 main top stopped the rally. This angle drops down to 1.6098 this week and remains key resistance.
At this time this currency pair is trading inside of a major range formed by 1.6618 to 1.5271. The retracement zone of this range is 1.5944 to 1.6103. In addition to the downtrending Gann angle, the 61.8% upper boundary also assisted in stopping the rally. For three consecutive weeks the 50% lower boundary has held as support.
The first sign of weakness last week was the penetration and subsequent close below the steep uptrending Gann angle at 1.6231 this week. This action suggests the market is set up for a break into another uptrending Gann angle at 1.5751. In addition to these angles, the market has also formed a short-term range defined by 1.5271 to 1.6618. The retracement zone of this range is 1.5718 to 1.5613. Combined with the uptrending Gann angle, a support cluster has been formed at 1.5751 to 1.5718. This zone is a potential downside target this week.
Fundamentally, the theme this week is the Bank of England’s outlook on inflation. The highlights are the BoE Inflation Letter, BoE Governor King press conference and the BoE Inflation Report. These announcements are sandwiched between a year-over-year CPI report and a retail sales report.
Unlike previous inflation reports and Governor King’s letters explaining why inflation overshot the central bank’s target, this week’s BoE inflation news is expected to be a big event because for the first time in a while the Inflation Letter is being published the day before the Inflation Report. This means that Governor King will have no choice but to talk in detail about the outlook for inflation. This is important because he may reveal when the Bank of England sees inflation returning to the central bank’s 2.0% target and what it intends to do to get it there. Traders are going to react to his statement and to his answers to questions the reporters are likely to pose regarding this matter.
In addition to the inflation report, traders will be looking at the retail sales report on Thursday which will help them assess the U.K.’s growth prospects. With the economy teetering on the brink of recession, increased consumer spending is going to be necessary to prevent the economy from sinker deeper.
In summary, with the GBP USD finding strong technical resistance last week, the way of least resistance may be to the downside this week. Some traders are expecting to see a drop in inflation from the previous month. It is expected to remain well above the 2.0% target but lower than previous reports. This could be the sign of a weakening economy that sends the British Pound lower versus the U.S. Dollar.