Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
So, yesterday we've taken a look at CAD, while today, I think, it will be useful to make analysis on GBP. Concerning GBP it has one really interesting topic - possible interest rate change by BoE. While we have relatively clear policy by Fed and by ECB, on BoE there are different assumptions stand. Particular speaking - what will happen in May, when next rate decision should be announced?
In general, UK economy is passing through not very happy period in its history. Low rates that were kept too long have made poor service to productivity. Taking in consideration brexit turnover brings even more uncertainty in long-term period.
At the same time last BoE session there was a clear hint from Ian McCafferty and Michael Saunders by voting for immediate 25 b.p. hike. Still, there is not the fact that rate change will occur. In last BoE sessions there is clear change in voices distribution and rate increase has less support compares to previous sessions:
Source: Fathom consulting/Thomson Reuters.
So here is not bad chance that either no rate change will come in May, or, it will not shift to real tightening cycle. Besides, BoE has revised down their forecast for GDP - 0.3% from 0.8%, which looks like solid revision.
As you know we're carefully looking for any new insight on this subject from Fathom consulting. This is, actually, a kind of tradition in our GBP analysis. Very often their contrary opinion has worked in the past. Now they come again with contrary statement:
"Although Ian McCafferty and Michael Saunders were some of the first to break rank last year, voting for a rate rise with a majority forming behind them several meetings later in November 2017, that is far from always the case. If we are right, and economic activity slows to below the pace that the MPC regards as the ‘speed limit’, the next monetary policy decision in May is likely to be a close call. Contrary to the consensus, our central view is that the MPC will not hike; but if it does, it is unlikely to mark the second of many."
COT Report
Here we do not have something really special. Mostly CFTC report indicates moderately bearish sentiment. Take a look that net long position is dropping gradually, but open interest has reduced as well, which means some long covering process.
Technicals
Monthly
Long term chart barely has changed as last 4-6 weeks. Price is coiling around YPR1 for 3rd month in a row after completion upside harmonic swing and reaching of 1/2 Fib resistance.
Although long-term view for GBP is not really positive and, as we read above, in Fathom's release, they expect some recession in 2018 and no rate increase from BoE.
Trend is bullish here and there are some moments that we should take care on. First is uncompleted very long-term AB-CD target around 1.1650 area. Market has turned up just 350 pips above it, which is small distance for monthly scale. When such turning happens, this creates friable background of upside action. In fact, you never know where precisely market could stepped out and start dropping again, tending to uncompleted target. The same situation we have here. The nature of price action definitely shows that this is not a trend - too many overlapping candles, long shadows and no thrusting action.
Market right now stands near overbought and inside resistance cluster of Fib level, YPR1 and natural area of monthly lows of 2007-2009 around 1.42 area.
In our previous analysis we've suggested that GBP could turn down somewhere around 1.39-1.41 and now we're just watching for response. Definitely market feels some barrier around it.
Finally, reaching of yearly Pivot resistance 1 will be a moment of particular interest. Pivots are not just support or resistance. They are sentiment indicators. And if GBP will fail to break it - this could become clear signal of coming downside reversal.
That's being said, monthly chart shows that GBP stands at some moment of truth. Downside reversal here could bring far-going consequences of bearish kind. While upside breakout of this area will indicate trend shift because price will break harmonic swing retracement and YPR1 area.
Weekly
Although we have bearish trend by MACD here, definitely it is too early to talk on breaking major upside tendency. Market will have to break upside channel and form bearish reversal swing to call it as reversal.
Now we could suggest just minor downside action as bearish grabbers have been formed, somewhere to lower border of the channel. Reaction on strong monthly resistance also was shy - just 3/8 retracement.
So, we could try to play with grabbers, but definitely there is lack of bearish signs to talk about possible reversal.
Daily
Daily TF also doesn't give us a lot of setups for trading. As we have weekly grabbers, weekly and daily bearish trends - we should keep an eye on bearish signs here. While GBP keeps previous tops valid, i.e. grabbers are intact - AB-CD pattern inside wide consolidation is possible.
Besides, AB=CD target agrees with grabber's one - taking out of previous lows. To check validity of this scenario we should watch for bearish continuation patterns on intraday charts - as placing stops above previous top is too expensive pleasure.
Intraday
Here market has formed H&S pattern, but it is mostly done as price already has hit OP target. At the same time second wave of sell-off could start if we will get some bearish continuation pattern. Take a look, that market has reached solid support area, which includes K-area and Agreement. As daily chart shows, April Pivot also stands around. It means that solid upside bounce could happen. Usually in such situations we are watching for "222" Sell patterns.
If "222" Sell indeed will be formed - action to XOP target could start which also creates an Agreement with major 5/8 Fib level around 1.3915.
Conclusion:
GB now is involving in multiple processes as political as economical - Brexit, Skripal tensions, Syria campaign participation just to name some. Financially, UK economy now stands in a difficult period. This gives a lot of uncertainty even in nearest future, including BoE policy.
For us it means that situation could change rapidly, and things that just yesterday were looking as rock hard clear could change in opposite direction.
Market doesn't look absolutely bearish right now and we do not have signs of reversal. At the same time, price stands at levels where it should either break strong resistance, or - it will indeed become bearish. Currently we're mostly focused on tactical AB-CD downside action, but who knows, what will happen under impact of political and economical factors...
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
So, yesterday we've taken a look at CAD, while today, I think, it will be useful to make analysis on GBP. Concerning GBP it has one really interesting topic - possible interest rate change by BoE. While we have relatively clear policy by Fed and by ECB, on BoE there are different assumptions stand. Particular speaking - what will happen in May, when next rate decision should be announced?
In general, UK economy is passing through not very happy period in its history. Low rates that were kept too long have made poor service to productivity. Taking in consideration brexit turnover brings even more uncertainty in long-term period.
At the same time last BoE session there was a clear hint from Ian McCafferty and Michael Saunders by voting for immediate 25 b.p. hike. Still, there is not the fact that rate change will occur. In last BoE sessions there is clear change in voices distribution and rate increase has less support compares to previous sessions:
Source: Fathom consulting/Thomson Reuters.
So here is not bad chance that either no rate change will come in May, or, it will not shift to real tightening cycle. Besides, BoE has revised down their forecast for GDP - 0.3% from 0.8%, which looks like solid revision.
As you know we're carefully looking for any new insight on this subject from Fathom consulting. This is, actually, a kind of tradition in our GBP analysis. Very often their contrary opinion has worked in the past. Now they come again with contrary statement:
"Although Ian McCafferty and Michael Saunders were some of the first to break rank last year, voting for a rate rise with a majority forming behind them several meetings later in November 2017, that is far from always the case. If we are right, and economic activity slows to below the pace that the MPC regards as the ‘speed limit’, the next monetary policy decision in May is likely to be a close call. Contrary to the consensus, our central view is that the MPC will not hike; but if it does, it is unlikely to mark the second of many."
COT Report
Here we do not have something really special. Mostly CFTC report indicates moderately bearish sentiment. Take a look that net long position is dropping gradually, but open interest has reduced as well, which means some long covering process.
Technicals
Monthly
Long term chart barely has changed as last 4-6 weeks. Price is coiling around YPR1 for 3rd month in a row after completion upside harmonic swing and reaching of 1/2 Fib resistance.
Although long-term view for GBP is not really positive and, as we read above, in Fathom's release, they expect some recession in 2018 and no rate increase from BoE.
Trend is bullish here and there are some moments that we should take care on. First is uncompleted very long-term AB-CD target around 1.1650 area. Market has turned up just 350 pips above it, which is small distance for monthly scale. When such turning happens, this creates friable background of upside action. In fact, you never know where precisely market could stepped out and start dropping again, tending to uncompleted target. The same situation we have here. The nature of price action definitely shows that this is not a trend - too many overlapping candles, long shadows and no thrusting action.
Market right now stands near overbought and inside resistance cluster of Fib level, YPR1 and natural area of monthly lows of 2007-2009 around 1.42 area.
In our previous analysis we've suggested that GBP could turn down somewhere around 1.39-1.41 and now we're just watching for response. Definitely market feels some barrier around it.
Finally, reaching of yearly Pivot resistance 1 will be a moment of particular interest. Pivots are not just support or resistance. They are sentiment indicators. And if GBP will fail to break it - this could become clear signal of coming downside reversal.
That's being said, monthly chart shows that GBP stands at some moment of truth. Downside reversal here could bring far-going consequences of bearish kind. While upside breakout of this area will indicate trend shift because price will break harmonic swing retracement and YPR1 area.
Weekly
Although we have bearish trend by MACD here, definitely it is too early to talk on breaking major upside tendency. Market will have to break upside channel and form bearish reversal swing to call it as reversal.
Now we could suggest just minor downside action as bearish grabbers have been formed, somewhere to lower border of the channel. Reaction on strong monthly resistance also was shy - just 3/8 retracement.
So, we could try to play with grabbers, but definitely there is lack of bearish signs to talk about possible reversal.
Daily
Daily TF also doesn't give us a lot of setups for trading. As we have weekly grabbers, weekly and daily bearish trends - we should keep an eye on bearish signs here. While GBP keeps previous tops valid, i.e. grabbers are intact - AB-CD pattern inside wide consolidation is possible.
Besides, AB=CD target agrees with grabber's one - taking out of previous lows. To check validity of this scenario we should watch for bearish continuation patterns on intraday charts - as placing stops above previous top is too expensive pleasure.
Intraday
Here market has formed H&S pattern, but it is mostly done as price already has hit OP target. At the same time second wave of sell-off could start if we will get some bearish continuation pattern. Take a look, that market has reached solid support area, which includes K-area and Agreement. As daily chart shows, April Pivot also stands around. It means that solid upside bounce could happen. Usually in such situations we are watching for "222" Sell patterns.
If "222" Sell indeed will be formed - action to XOP target could start which also creates an Agreement with major 5/8 Fib level around 1.3915.
Conclusion:
GB now is involving in multiple processes as political as economical - Brexit, Skripal tensions, Syria campaign participation just to name some. Financially, UK economy now stands in a difficult period. This gives a lot of uncertainty even in nearest future, including BoE policy.
For us it means that situation could change rapidly, and things that just yesterday were looking as rock hard clear could change in opposite direction.
Market doesn't look absolutely bearish right now and we do not have signs of reversal. At the same time, price stands at levels where it should either break strong resistance, or - it will indeed become bearish. Currently we're mostly focused on tactical AB-CD downside action, but who knows, what will happen under impact of political and economical factors...
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
