With the weakness in the US Dollar Index the past few weeks has noticed that most of the major currency pairs seem to have formed a bottom. EURUSD, for example dipped lower to 1.10975 before easing back from the lows. Likewise, GBPUSD also witnessed a bounce from the lows of 1.49516 levels few weeks ago and has been quietly lifting off from the lows.
While this current short term pattern is nothing to get excited about and doesn’t in any way reflect a possible change of trend, this short term reversals does however offer traders on all ends a bit of an opportunity. For those who were previously long on the US Dollar Index, could possibly look at booking their profits while those who missed the boat could view this as an opportunity to enter long positions on the US Dollar once this short term correction is completed.
GBPUSD Long term view
From the daily charts, GBPUSD has managed to respect the falling price channel, drifting between the highs and lows of the price channel.
Most recently, we notice a push to the upside especially after the lows to 1.49516 was formed.
Switching to a line chart further reveals a “somewhat” inverted head and shoulders pattern, with price action currently looking as if it just broke the neckline. The minimum target objective of this inverted head and shoulders pattern points towards 1.53811 levels, which is incidentally quite close to the unfilled down gap that was formed back in early January this year.
Although fundamentally, the UK has been lagging the US on all fronts; starting from the interest rate differentials (in the expectations of a rate hike) to the GDP growth rate (where recent data revealed a slowdown in the UK’s economy during the fourth quarter of 2014). Despite the differences, the market’s behavior shows that we should be prepared for a possible jolt from the US Dollar.
Last month’s BoE minutes showed that two of the MPC members who were previously hawkish on interest rates fled the camp with the BoE’s members now unanimous towards keeping interest rates unchanged. This, coupled with the fact that UK heads for general elections in May later this year, is quite likely to prompt the Bank of England to put any monetary policy changes on hold until the main political event is done with. This view is likely to grow stronger as the months draw closer.
The main concern with the BoE (and as with any Central Bank) has been inflation, which was largely due to the steep declines in Crude Oil. With nothing much being changed at least until today’s BoE’s monetary policy meeting, we can expect to see no changes.
However, the fact that inflation has also affected the US economy cannot be ignored, regardless of what the Fed’s view is. With economic data continuing to come out weaker than expected, it would only be a matter of time before the Fed announces a possible delay to its rate hike plan, perhaps shifting from a June rate hike to possibly August.
