Chart of the Day: GBPUSD
It’s always tough to buy the GBP with any conviction, with the Bank of England turning progressively more bearish. UK data has rolled in on the soft side, and it seems highly likely Boris Johnson will take home the Tory leadership challenge.
The fact, then, that the GBP is 1.7% lower against the USD over the past month — arguably the worst performer in G10 FX — is testament to the poor feel around the pair. GBPUSD, as a result, has come into test multi-year support at 1.2476, and continues to trade below the five-day EMA, making a series of lower lows. From a momentum perspective, the odds favour further downside. We’ll need to hear something quite inspirational to promote a true trend reversal and a through key resistance into 1.2750.
That said, GBP shorts would have noticed the triple divergence on the daily chart, between price and stochastic momentum. This can show exhaustion in the trend, and can be one of the best reversal indicators. It still needs to play out, and we watch for a bullish stochastic crossover to confirm a change in momentum — one to watch as there’s a real battle in this chart that needs to rectify.
Fundamentally, there’ll be some focus on Tuesday’s live TV debate between Tory leadership candidates Jeremy Hunt and Boris Johnson, although most of the move could come from the USD side of the equation. So, this week we watch US CPI, as well as a keynote speech from Federal Reserve Chairman Jerome Powell (Thursday at 00:00 AEST). After Friday's sharp rebound in the US nonfarm payrolls, the market has priced out a 50bp cut, causing USD inflows. But a 25bp cut is still 100% priced (by rates markets), and this feels right.
A close through 1.2476 would be a bearish signal.
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*Investment Trends 2017 Australia FX Report