GBPUSD – Monthly Analysis for January 2015

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GBPUSD closed the month of December at 1.5584 and in the process has formed what looks like an indecision candlestick pattern. The monthly charts shows the appearance of this candlestick pattern near a major trend line making it an important candlestick pattern worth remembering, heading into a new trading month.

The confluence of both a rising and falling trend line and current price action will determine the outcome for future direction of the Cable, where a move higher from current levels preferably with a higher or a bullish close could potentially shift consensus to bullish on the Cable, if not at least a correction. Whereas, a decline below both the trend lines could turn very bearish for the Cable, and price could easily target the next support level at 1.519, the lows of August 2013.

GBPUSD

 

From the longer term perspective, the bearish continuation holds more weight considering that the rally to 1.7 levels coincides with a 38.2% retracement of the larger decline.

The Cable, once considered strong has given up most of its gains last year as the US Dollar started gaining momentum on a better than expected economic growth as well as enjoying one of the fastest growths in the labor markets. Inflation has been a drag on the economy, but something that has plagued most of the countries across the world.

After the Federal Reserve ended its QE3 purchases in October last year, the markets have been pushing up the Dollar on speculative bets that the Central Bank would raise interest rates ahead of the Bank of England which has been sitting tight and more recently the sharp decline in inflation has been further weighing down on the BoE’s monetary policy.

It is most likely that BoE chief, Mark Carney will be writing an open letter to the British Chancellor explaining why the Central bank failed to meet its inflation target of 2%, and we can very well assume that falling Crude oil prices will be one of the major reasons to blame.

That being said, the GDP in the UK has slowed down drastically in 2014 after enjoying a rapid growth earlier in 2013 after nearly avoiding a triple dip recession. While the story of bouncing from the lows has been one that has enthralled the markets, the UK has failed to capitalize on the growth, which was once considered to be the most likely developed economy to raise interest rates in 2014.

With economic data for the month of December due to be released in the coming weeks, we will get a clearer picture for the annual GDP growth for the country. Labor market has managed to however improve with the UK’s unemployment rates sitting at 6% as well as seeing a pickup in wages, which incidentally, the BoE Governor, Carney had last year noted that interest rate hikes would come ahead of wage growth, something which seems to have reversed ever since.

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