The Case For GBPUSD Bulls

• faithmight
• July 18th, 2010

What a tremendous rally for bulls! After a false breakout to the downside, the US dollar weakened significantly on poor US fundamentals. Economic releases from the US have been particularly weak inspite of the strong earnings from many companies on Wall Street. The strong earnings increased risk appetite as stocks soared thus further weakening the US dollar. The fundamentals out of the UK, in contrast, have been mixed so the US dollar has suffered on the contrasting data. After a strong rally all week, price began to retrace on Friday as traders booked profits at the end of the week.

With price currently correcting, we want to be aware of how deep this correction can continue before the up trend reestablishes itself. After the period of consolidation on the daily chart (and the double top on the weekly chart at 1.5240), there is now a 1st bullish wave on both the daily and weekly chart. A 1st wave usually marks the beginning of a trend and as such makes a strong case for the $GBPUSD to rally higher.

Levels to Watch To The Downside

1. 1.5270, the 38.2% Fibonacci retracement level of the 1st bullish wave on the daily chart
2. 1.5207, the 50% Fibonacci retracement level of the 1st bullish wave on the daily chart

Levels To Watch To The Upside

1. 1.5470, the high of last week
2. 1.5500, the major half point and psychological level
3. 1.5552, the 50% Fibonacci level of the bigger bear trend on the weekly chart AND where the 200SMA hits on the daily chart

Sentiment has shifted as the market seems to be trading based on fundamentals as the US dollar managed to weaken across the board. A slowing US economy bodes trouble for the global recovery as the world’s largest consumer begins to soften demand once again. Inflation is still nonexistent in the US while the UK continues to deal with mild inflation. The deflation and weakening consumer demand will keep the Fed on hold until data proves that the economy is back solidly in recovery mode. On the other hand, though the BoE has no intention of moving on monetary policy, with inflation and an slightly improving labor market, the BoE now has to be on watch for an interest rate hike if economics and inflation continue to be positive. Though home prices continue to fall in the UK, this week we have the release of the Bank of England minutes and 2Q GDP. If the both are hawkish, then expect cable to rally back towards 1.5500 especially if US economic news continues to come in weaker-than-expected.

Though I maintain a bullish bias on the $GBPUSD, I am very watchful of this current retracement. The USD could stand to strengthen as correlations in the market seem to support USD strength. If price enters the zone below 1.5207, looks for bids at these levels. If price enters the zone above 1.5552, watch for offers at those levels. Trade what you see not what I think!

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: $USDX, chart, daily, GBPUSD, weekly

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