Mounting calls for slower growth in the U.K. along with a close near the low of the week were clear indications that sellers were in control of the GBP USD. With economic conditions expected to soften and the situation in the Euro Zone continuing to expand, short-traders were expected to continue to pile on, driving this currency pair into the early October bottom at 1.5271.
Last week’s movement into the safety of the U.S. Dollar also cast a pall on the Sterling. All of these factors are the main reasons for the down trend, but technically oversold conditions and rumors coming out of Europe over the week-end may be enough to temporarily halt the decline, setting up the possibility of short-covering rally. Early strength in the market on Monday suggests that traders are buying into the news, or perhaps short-traders are backing off from adding to their positions, hoping to short again at a higher price.
Support this week is on an uptrending Gann angle at 1.5431. Coupled with last week’s low at 1.5422, creates a support cluster at 1.5431 to 1.5422. A break through this cluster is likely to trigger a resumption of the down trend with the main bottom at 1.5271 the next downside target. On the upside, resistance is not expected to play much of a role since a new trend hasn’t been established. The market is likely to rally until the weakest short is driven out. This puts the emphasis on trading action this week rather than price levels.
Although the British Pound is tracking the Euro closely, a few events this week could fuel a break in the British Pound and a decoupling of the two currencies. Bank of England Governor Mervyn King is expected to reiterate that the central bank is prepared to buy more assets for its quantitative easing program. This program which calls for the central bank to flood the market with British Pounds is an attempt to stimulate the economy, but it is also bearish for the Sterling because it increases liquidity.
U.K. Retail Sales is expected to show that consumer confidence remains low. This will contribute to expectations of a sluggish economy forecasted by the Bank of England. On Tuesday, the U.K. government will release its autumn budget statement. This report is expected to show a significant cut to the country’s economic growth forecast. This news may or may not trigger a sell-off in the GBP USD since the subject of slow economic growth came up two week’s ago in a Bank of England forecast. Wednesday’s nationwide strike of public sector workers is also expected to put pressure on the British Pound.
The weekly chart indicates the GBP USD is poised to move lower over the near-term. Oversold conditions and a stronger Euro could delay a break to the next level of support at 1.5271. These two factors suggest the market is ripe for a short-covering rally. Aggressive traders may want to bottom pick at current price levels, however, with the main trend down, it looks as if waiting for the first round of short-covering to complete itself, may set up a better trade on the short-side. The fundamentals are expected to support further deterioration of the Sterling, but this new wave of selling may not occur until after a reasonable short-covering rally takes place.