And The Cable Breaks

• faithmight
• February 21st, 2010

Last week, we were watching for:

…a rally to complete the quarter to 1.5750. But after that target is hit, it is time to watch price to determine what cable does at these levels. To the upside lie a number of resistance levels: 1.5764, yesterday’s high; 1.5774, the high on February 5; and then 1.5800, the 50% Fib. If price breaks above these levels with confirmation, then price can continue to rally back towards the 1.6000 large quarter point and major psychological level. To the downside, if price remains below 1.5750 even after a break of that level, look for a return to 1.5560 support and a possible break down to 1.5500.

The $GBPUSD spent most of last week consolidating within a narrowing range between 1.5560 on the bottom and 1.5750 on top. Before the Fed’s surprise, between-meetings announcement, the $GBPUSD was actually looking very bullish. The range narrowed and price actually produced a breakout to the upside breaking the aforementioned resistance levels with a high of 1.5814. Despite that bullish performance, price quickly fell away from the highs and closed the day way below 1.5800 at 1.5686. That was a first bearish clue as price did not find support at any of those former resistance levels.

Then the Fed provided the catalyst it needed to break out of its holding pattern. After the Fed raised the discount rate on Thursday, cable plummeted 340 pips to test MT support at the 1.5370/50 area. It is a very bearish development that price would test the MT support so quickly after breaking 1.5531 ST support and the 1.5500 whole number. So price exhaustion immediately after the Friday, Feb 19 low at 1.5345 is not very surprising after such a price move. However, the weekly close below 1.5500 at 1.5462 is a very bearish development.

Another bearish indicator that gives the bears more of a case is the wave count. The consoldiation on the daily chart zeroed the wave counter giving price the “rest” needed if it was going to break such strong support levels below 1.5531. The now first bearish wave on the daily chart marks the beginning of another leg of the downtrend meaning cable could still break new lows. However, one red flag that gives me caution in that scenario is the wave count on the weekly chart. This chart is in the beginning of its 3rd bearish wave. Cable could move below 1.5350 but a substantial move may possibly be muted. Price targets 1.5250 after a break of support at 1.5345.

The current correction rally could face resistance at 1.5509, the 50% Fibonacci level on the hourly chart as Friday’s price move was a simple correction of the Fed-induced price breakdown on Thursday. Back to the daily chart, the current correction rally could take the $GPBUSD to 1.5525 which is the 38.2% Fibonacci retracement level. This Fibonacci level is very important because not too far above that is major resistance-turned-former-support at 1.5531 that held for 8 trading sessions after making the February 8th low at that price point. This level is expected hold and a break above would require confirmation of a weekly close to turn the pair bullish. If price stages a continuation back to the downside, as expected, watch price action at 1.5350. If price gets back there, this would be a second attempt at that level and it could give way. A break targets 1.5250 as price slowly makes its way towards MT support at 1.5050 and the 1.5000 major psychological level.

Fundamentally, the Fed’s discount rate hike gives the $USD a clear edge over the $GBP. The Fed is now seen as hawkish and the FOMC member Hoeing’s dissent at the last meeting gives this sentiment change even more credence. The Fed is even slightly more optimistic about the US’s economic recovery. While the Bank of England (BoE) remains unchanged, the market suspects more quantitative easing may be necessary from the central bank especially in the face of the UK’s rising fiscal debt. This stark contrast in monetary policy and central bank sentiment gives the $USD a clear edge over the $GBP. This week’s calendar sees both UK and US GDP releases on Friday as major releases for cable as both countries’ economic growth will be contrasted. The calendar is quite stark from the UK before then. The US will release manufacturing numbers, durable goods, home sales and consumer confidence all this week. There is a glut of economic news from the Eurozone which will affect the market’s risk appetite as the markets will watch to assess the effect, if any, of the PIIGS on the rest of the Eurozone (i.e. Germany and France). Any increase in risk aversion will support the $USD and a continued slide the in the $GBPUSD exchange rate.

As always, trade what you see folks, not what I think!

Tickers: GBPUSD

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