British Pound – Where to from here?

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Last week, the Bank of England hiked interest rates for the first time in nearly a decade by 25 basis points. The rate hike was widely expected, and the BoE Governor Mark Carney hinted that future rate hikes would be limited and gradual.

Despite the rate hike, the British pound sold off on the event. This came as the BoE’s gave a downgraded view on its assessment on the supply side. The central bank cited “considerable risks” to the UK’s economic outlook. The rate hike is expected to have but a material impact on household mortgages, especially those with floating or variable interest rates.

However, for the most part, the economic outlook for the UK remains on how the Brexit talks will progress. While this may be the case, wage growth will remain key for the central bank’s next decision. Market speculation puts the timing of the rate hike towards the late first half of next year. The rate hike is also expected to be a one and done deal come 2018.

The UK’s political and macroeconomic outlook has not changed much. Real GDP growth was seen rising 0.4% on a quarter over quarter basis in the third quarter. This was slightly higher than the 0.3% increase in the second quarter. The BoE made a modest downward revision to its growth forecasts last week. It now expects GDP to expand around 1.6% on an annual basis in 2017 and 2018.

The British pound sold off strongly following the BoE’s decision. GBPUSD fell 1.4% on the day on Thursday while EURGBP rallied 1.83%. With the outlook for the US and the Eurozone seen to be positive, the British pound is expected to remain subdued.

Here’s a quick technical outlook on the EURGBP and the GBPUSD currency pairs.

EURGBP – Bias remains neutral for now

The EURGBP long-term chart shows that the bias remains broadly balanced for now. The technical outlook presents the descending channel pattern has been formed. Support has been firmly established near 0.8760 with price seen making lower highs resulting in a descending triangle pattern.

EURGBP Technical Outlook – Descending triangle pattern
EURGBP Technical Outlook – Descending triangle pattern

Following last week’s rally, price briefly retraced the next day. Thus, a downside breakout makes quite possible for the EURGBP to push lower. A break down below 0.8760 could lead to a decline towards the next target level seen at 0.8423.

However, watch the double bottom pattern has formed. The minor resistance at 0.9004 will need to be breached in order for EURGBP to post any significant gains. The upside, however, remains limited as price action could see a retest back to the previous highs around 0.9300 levels.

In the short term, EURGBP will need to break out to the upside from the falling trend line in order to maintain a convincing bullish bias. Failure to do so could, however, send the EURGBP tumbling back to the 0.8423 which will push EURGBP back to the levels from which it started trading this year.

GBPUSD – Bearish trend to continue

For the GBPUSD, price reversed gains after briefly trading near the 1.3600 handle. The reversal in prices came about as GBPUSD was met with resistance from the falling trend line that has been in place since the past year.

GBPUSD Technical outlook – Trend line break
GBPUSD Technical outlook – Trend line break

The declines in GBPUSD soon saw price action consolidating into a triangle pattern following the medium term rally to the 1.3600 price level. With price testing, the medium term rising trend line, a breakdown below this level could trigger GBPUSD declines towards the next support level at 1.2773.

This is expected to hold the price for the short term, but at the same time, any bounce off this support level could lead to a potential head and shoulders pattern that could be evolving which increases the likelihood of a decline in the coming months.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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