Sive Morten
Special Consultant to the FPA
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Fundamentals
Today, guys, as we've promised, we will take a look at GBP, because cable is another currency where we see big processes and reflection of these processes we see on the GBP/USD chart
Two weeks ago we've placed detailed analysis on UK situation and major difficulties that it should meet in near term. In general, there are two issues - first is Brexit and related problems, one of them is physical border between EU and UK. Second - mismatch between BoE promises and its view on economy and real situation in economy. Second issues is more important for us, because it has direct relation to BoE rate policy, and, as we know, next meeting should happen on coming week.
Mismatch that we've mentioned shows that real UK economy data shows recession and worse situation compares to those that BoE puts in its own view. As a result, investors were trapped in a wrong direction. Strong rally 3-4 weeks ago on expectation of rate increase and miserable collapse within recent 2 weeks.
Of course recent drop stands not just because of UK. Dollar strength is also add fuel to the fire. We've talked about just yesterday, in EUR research. So, what really awful we have in UK?
Since the beginning of the year, we follow Fathom consulting analysis on UK situation, which we think is quite accurate. They start to talk about recession in UK economy since the beginning of the year and express real doubts on consistent rate change by BoE. Culmination is coming right now, when Governor Mark Carney stands in difficult situation. Since he joined the BoE in 2013, Carney has signaled several times that rates were likely to rise, only for economic data to go the wrong way.
With the prospects for Britain’s economy unclear and the terms of Britain’s departure from the European Union far from settled, Carney is likely to want to hedge his bets on Thursday.
As Reuters correctly points - The biggest challenge will be to keep the prospect of a further rate rise this year credible in the eyes of investors, who feel wrong-footed by a slowdown in the economy that may well prove temporary and by the BoE’s shifting guidance.
This becomes special feature of BoE - to miss their promises. Previously we've done few successful trades on counter opinion as on rate decision as Parliament elections, when we put the bet that T. May will not get a majority and GBP will drop.
Sterling fell to its lowest since January against the U.S. dollar on Friday as markets priced diverging prospects for growth and interest rates on the two sides of the Atlantic.
“Resetting communication after sitting out a rate hike will be an uphill task for the Monetary Policy Committee,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said in a note to clients.
“It will have to make a convincing case that softness in Q1 ... is transitory,” they said. “Markets will likely be reluctant to adhere to the MPC’s rhetoric given the abrupt change in course witnessed shortly ahead of the May meeting.”
Indeed Q1 results was less than even BoE expects - just 0.1% against 0.3% expected. Fathom consulting confirms that it stands in a row with their long-term view and "evens chance of recession this year, and that the MPC will keep interest rates on hold when it meets in May."
Despite possible revision of Q1 results, Fathom thinks that situation will become worse later, in 2018. In fact, per capita GDP contracted by 0.1% on the quarter.
BoE appeals to bad weather and assumes that construction and retail sector were harmed by it. But, construction was dropping all three months of the quarter.
It means that BoE with high probability will keep rate unchanged in coming May meeting.
COT Report
Recent CFTC data also confirms bearish sentiment and speculative net long positions start dropping:
Technicals
Monthly
In our previous analysis we said - "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."
Fundamental background is not really positive for UK now. As we read above, in Fathom's release, they expect some recession in 2018 and no rate increase from BoE.
As in last week of April GBP has dropped further, our gravestone doji almhas turned to clear bearish reversal month with W&R of previous top, which is important bearish sign. This pattern doesn't promise yet the global collapse, it will just put foundation for pullback. But who knows, what will happen later.
Previously we've mentioned that overall upside shape of price doesn't show real thrusting signs. It is rather gradual and major answer we will get as soon as harmonic retracement will be completed. Now time has come, and we see mostly bearish price action. This let's us to recall our bearish targets.
First, GBP has 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.
Finally, as on EUR - Cable has failed to break through Yearly Pivot resistance 1. This fact tells, that current upside action indeed is just a retracement within long-term bear trend.
While market stands inside recent swing, until 1.18 lows will be meet again, there is no sense to take in consideration lower targets. Thus, within few months we mostly will talk on targets that stand on lower time frames.
Weekly
Weekly TF confirms our suggestion. Indeed, price action here takes the shape of Double Top pattern. Price has broken channel support and first 3/8 Fib level.
Still, GBP is not at OS by far, and next destination point that should be met on coming week is 1.3385-1.3460 K-support area.
It means that we should be careful to any bullish patterns that could be formed on daily chart.
Daily
On daily chart we do not have a lot of forecasting tools. The one thing that we could use is an extension, based on Double Top pattern. Double Top itself has classical target around 1.31 area, while extension of the tops points on 1.3350 as XOP target.
This is not quite correct extension, guys, because "C" point stands slightly above "A", but it is possible to use it for support area estimation. Besides, XOP coincides with weekly K-support.
Second issue here is downside thrust of course. As on EUR - it could become a source of patterns, particular speaking - B&B "Sell" as soon as any retracement will appear on horizon.
Here market is creeping with oversold line (not shown), that's why downside continuation probably will remain gradual.
Intraday
4H chart shows that GBP has touched support cluster, which includes MPS1, 1.27 extension of large upside swing (second top of Double top pattern) and also completed steep AB=CD pattern inside the channel. Also, as we know, this is daily OS area.
Thus, we can't exclude possible upside bounce on Monday, but retracement hardly will be significant as market is not at any strong Fib level. Pullback hardly will exceed 1.3680 or 1.38 K-area levels. That's why any bearish continuation patterns here, such as "222" Sell, will provide good chance to go short with 1.3350 target:
If market indeed will reach 1.3820 level - it will re-test Double Top neckline and complete daily B&B "Sell" setup.
Conclusion:
GB now is involving in multiple processes as political as economical. Financially, UK economy now stands in a difficult period. This gives a lot of uncertainty even in nearest future, including BoE policy.
Finally GBP starts to show clear bearish signs of solid strength which could have far going consequences.On coming week we're mostly interested in upside pullback, which could give better conditions for short entry.
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.
Today, guys, as we've promised, we will take a look at GBP, because cable is another currency where we see big processes and reflection of these processes we see on the GBP/USD chart
Two weeks ago we've placed detailed analysis on UK situation and major difficulties that it should meet in near term. In general, there are two issues - first is Brexit and related problems, one of them is physical border between EU and UK. Second - mismatch between BoE promises and its view on economy and real situation in economy. Second issues is more important for us, because it has direct relation to BoE rate policy, and, as we know, next meeting should happen on coming week.
Mismatch that we've mentioned shows that real UK economy data shows recession and worse situation compares to those that BoE puts in its own view. As a result, investors were trapped in a wrong direction. Strong rally 3-4 weeks ago on expectation of rate increase and miserable collapse within recent 2 weeks.
Of course recent drop stands not just because of UK. Dollar strength is also add fuel to the fire. We've talked about just yesterday, in EUR research. So, what really awful we have in UK?
Since the beginning of the year, we follow Fathom consulting analysis on UK situation, which we think is quite accurate. They start to talk about recession in UK economy since the beginning of the year and express real doubts on consistent rate change by BoE. Culmination is coming right now, when Governor Mark Carney stands in difficult situation. Since he joined the BoE in 2013, Carney has signaled several times that rates were likely to rise, only for economic data to go the wrong way.
With the prospects for Britain’s economy unclear and the terms of Britain’s departure from the European Union far from settled, Carney is likely to want to hedge his bets on Thursday.
As Reuters correctly points - The biggest challenge will be to keep the prospect of a further rate rise this year credible in the eyes of investors, who feel wrong-footed by a slowdown in the economy that may well prove temporary and by the BoE’s shifting guidance.
This becomes special feature of BoE - to miss their promises. Previously we've done few successful trades on counter opinion as on rate decision as Parliament elections, when we put the bet that T. May will not get a majority and GBP will drop.
Sterling fell to its lowest since January against the U.S. dollar on Friday as markets priced diverging prospects for growth and interest rates on the two sides of the Atlantic.
“Resetting communication after sitting out a rate hike will be an uphill task for the Monetary Policy Committee,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said in a note to clients.
“It will have to make a convincing case that softness in Q1 ... is transitory,” they said. “Markets will likely be reluctant to adhere to the MPC’s rhetoric given the abrupt change in course witnessed shortly ahead of the May meeting.”
Indeed Q1 results was less than even BoE expects - just 0.1% against 0.3% expected. Fathom consulting confirms that it stands in a row with their long-term view and "evens chance of recession this year, and that the MPC will keep interest rates on hold when it meets in May."
Despite possible revision of Q1 results, Fathom thinks that situation will become worse later, in 2018. In fact, per capita GDP contracted by 0.1% on the quarter.
BoE appeals to bad weather and assumes that construction and retail sector were harmed by it. But, construction was dropping all three months of the quarter.
It means that BoE with high probability will keep rate unchanged in coming May meeting.
COT Report
Recent CFTC data also confirms bearish sentiment and speculative net long positions start dropping:
Technicals
Monthly
In our previous analysis we said - "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."
Fundamental background is not really positive for UK now. As we read above, in Fathom's release, they expect some recession in 2018 and no rate increase from BoE.
As in last week of April GBP has dropped further, our gravestone doji almhas turned to clear bearish reversal month with W&R of previous top, which is important bearish sign. This pattern doesn't promise yet the global collapse, it will just put foundation for pullback. But who knows, what will happen later.
Previously we've mentioned that overall upside shape of price doesn't show real thrusting signs. It is rather gradual and major answer we will get as soon as harmonic retracement will be completed. Now time has come, and we see mostly bearish price action. This let's us to recall our bearish targets.
First, GBP has 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.
Finally, as on EUR - Cable has failed to break through Yearly Pivot resistance 1. This fact tells, that current upside action indeed is just a retracement within long-term bear trend.
While market stands inside recent swing, until 1.18 lows will be meet again, there is no sense to take in consideration lower targets. Thus, within few months we mostly will talk on targets that stand on lower time frames.
Weekly
Weekly TF confirms our suggestion. Indeed, price action here takes the shape of Double Top pattern. Price has broken channel support and first 3/8 Fib level.
Still, GBP is not at OS by far, and next destination point that should be met on coming week is 1.3385-1.3460 K-support area.
It means that we should be careful to any bullish patterns that could be formed on daily chart.
Daily
On daily chart we do not have a lot of forecasting tools. The one thing that we could use is an extension, based on Double Top pattern. Double Top itself has classical target around 1.31 area, while extension of the tops points on 1.3350 as XOP target.
This is not quite correct extension, guys, because "C" point stands slightly above "A", but it is possible to use it for support area estimation. Besides, XOP coincides with weekly K-support.
Second issue here is downside thrust of course. As on EUR - it could become a source of patterns, particular speaking - B&B "Sell" as soon as any retracement will appear on horizon.
Here market is creeping with oversold line (not shown), that's why downside continuation probably will remain gradual.
Intraday
4H chart shows that GBP has touched support cluster, which includes MPS1, 1.27 extension of large upside swing (second top of Double top pattern) and also completed steep AB=CD pattern inside the channel. Also, as we know, this is daily OS area.
Thus, we can't exclude possible upside bounce on Monday, but retracement hardly will be significant as market is not at any strong Fib level. Pullback hardly will exceed 1.3680 or 1.38 K-area levels. That's why any bearish continuation patterns here, such as "222" Sell, will provide good chance to go short with 1.3350 target:
If market indeed will reach 1.3820 level - it will re-test Double Top neckline and complete daily B&B "Sell" setup.
Conclusion:
GB now is involving in multiple processes as political as economical. Financially, UK economy now stands in a difficult period. This gives a lot of uncertainty even in nearest future, including BoE policy.
Finally GBP starts to show clear bearish signs of solid strength which could have far going consequences.On coming week we're mostly interested in upside pullback, which could give better conditions for short entry.
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.
