GBP/USD: Minor upswing before further sell-off resumes

The British Pound was sold after the data in the UK showed core inflation cooled down in March. Nevertheless, the pair managed to sustain above 1.46 levels as we head in the US session. The currency faces a risk of being sold once again as US currency traders enter markets, however, we have US advance retail sales data on cards today.

The pair has seen a sharp rise in volatility, which it usually does ahead of elections in the UK. Given the high probability of a hung parliament, the British Pound is likely to be sold on upticks. However, the resilience showed by the pair so far indicates a possibility of a minor correction – 100-150 pips before the pair resumes sell-off.

We could see the GBP/USD pair rise to 1.4720-1.4760 in a couple of sessions as –

GBP/USD resilient despite decline in UK core inflation: The pair has managed to sustain above 1.46 and recover back to 1.4662 levels even after the data in the UK showed a softer core reading and RPI miss. As per the headline figure (0.00% year-on-year), the economy narrowly avoiding deflation for the second consecutive month. The resilience showed by the pair makes it a contender for being the biggest beneficiary of a weaker-than-expected retail sales data in the US today. Moreover, there is not much difference between the policy expectations from the BOE and the Fed. At the current juncture, the Pound lags mainly due to the election uncertainty rather than policy divergence.

GBP to benefit through selling in EUR/GBP cross: The ongoing Greece issue is likely to see a sell-off in the EUR/GBP pair. Moreover, due to political uncertainty, the cross border flows enter UK markets, especially UK Gilts and German Bunds. Consequently, the dip in the UK gilt yields may not lead to a sell-off in the GBP/USD pair. Possibility of Greece heading to reelections has already brought back fears of Grexit. Any news on Greece could support GBP/USD due to sell-off in the EUR/GBP cross.

When viewed in light of both the factors, the British Pound appears attractive, especially in case of a weaker-than-expected US Advance retail sales data. Talking about the retail sales; the data has been disappointing for three consecutive months – Dec, Jan, and Feb. Markets are expecting the data to show retail turnover in March expanded 1.1%, compared to 0.6% dip in February.

In case, we see another month of weak retail sales today, a sharp decline in the US 10-year and 2-year Treasury yields could be seen. Even a positive figure, which is below expectations could trigger weakness in Treasury yields and the US dollar. On the other hand, a stronger-than-expected data could strengthen the USD. However, the actual figure has to beat expectations by a wide margin in order to see a another leg up for the USD. Else, the GBP/USD pair could sustain above 1.46, eventually rising to 1.4720-1.4660.

Technical factors also indicate a strong support at 1.46. On the hourly chart, we see a triple bottom/inverted head and shoulder formation (looks more of H&S) with neckline resistance at 1.47.

At the moment, the pair is trading at 1.4645, with gains being capped at 1.4661 (23.6% Fib retracement of 1.4971-1.4565). Given the bounce post UK inflation report, it is likely that the pair could rise above 1.4661 to test the neckline resistance at 1.47. With a weaker-than-expected US advance retail sales data, we are likely to see the pair breach the 1.47 resistance today. On the other hand, a strong data could push the pair down to 1.46.