GBP/USD: Decision Time

Over the last two weeks the GBP/USD has been on quite the roller coaster ride.  It started the month of October trying to lick the wounds of a 550 point drop down through 1.60, and succeeded for the most part as it rallied back up to 1.62 before markets around the world started dropping like flies.  Now as we end the week, there is newfound optimism as risk markets have found some footing for a higher move.  The overall trend though for most markets is still to the downside, and the GBP/USD finds itself on a very interesting precipice at the start of next week where fundamental factors could have a dynamic impact.

On the fundamental side of the equation, the UK doesn’t really have a busy week of news upcoming, but the events that are scheduled are significant including the Bank of England’s meeting minutes and MPC vote counts, Retail Sales, and the preliminary release of GDP.  Any or all of these events could impact price significantly, and in addition, the BoE’s chief economist mentioned publicly that interest rates could remain lower for longer in a “gloomier economy.”

So the race to be the first major central bank to raise interest rates has changed hands a couple of times over the past ten days or so with the Fed being in the lead to start, then relinquishing it to the BoE after the Fed’s minutes sounded dovish, then back to the Fed after low inflation numbers in the UK along with the opinion of the BoE’s chief economist.  If the market agrees with that sentiment, the USD could be the popular go-to currency once again.

Technically, the downtrend for the pound sterling originally began back in July as the GBP/USD couldn’t quite break 1.72, but for the purposes of this article, let’s stick to the most recent past.  In mid-September a significant high was achieved and began a declining trend that has been approached once again as we end this week.  Coincidentally, this is also the 61.8% Fibonacci retracement of the most recent significant high to low as well as the psychologically significant 1.61 round handle.  Typically, when a conflation of events happens like this, it gives us a higher probability of finding a level at which the market could turn.  If you add in the fundamental and interest rate considerations, the argument for a further fall gets even stronger.