GBP/USD bounces off key support; UK GDP eyed

The GBP/USD has bounced back from a key technical support area amid light volumes today. As there was no major economic data scheduled for release and many US investors were probably stuck in snow, traders have found the perfect opportunity to take profit on their long dollar positions with the latter even falling against the euro and Canadian dollar, currencies which ‘should’ be falling due to the recent monetary policy easing measures from the ECB and BoC. But the GBP/USD’s rally could fade away as it is currently testing key resistance around 1.5080 (see below for details) and ahead of the fourth quarter UK GDP data tomorrow. Growth in the UK economy is expected to have moderated to 0.6% in Q4 after expanding by 0.7% in Q3. But recent macro pointers from the UK have been far from convincing and the risk is that GDP may miss analysts’ estimates. If seen, this could cause the GBP to weaken further. Tomorrow, we will also have some US data to look forward to, which may provide clearer direction for the markets. These include durable goods orders, consumer confidence and new home sales numbers.

As mentioned above, the GBP/USD has found support from a major long-term technical area around the 1.50 handle today. As well as a psychological level and horizontal support, this is where a long-term trend line going back all the way to 1985 comes into play. But as can be seen on the chart, this trend line goes through the wicks of the most recent monthly candles, making its precise position a bit subjective. An alternative and objective way of drawing this trend line would be by connecting the low point of 1985 with that of 2009 and extending the line to the future. In this case, the trend line would come in some much lower around 1.4290 (dotted line). Meanwhile the trend line, whichever way plotted, would loosely convergence with a Fibonacci retracement level of the upswing from the 2009 low: the 61.8% retracement level is 90 pips below 1.50, at 1.4910, while the 78.6% retracement is at 1.4290. Therefore, a potential break through the 1.4910/1.5000 support area (shaded in light blue) could lead to an eventual move down to 1.4290 where support may (initially) hold firm. The monthly MACD has recently created a bearish crossover which suggests that the Cable may indeed break lower.



However, zooming into the daily chart and we can see that another momentum indicator, the RSI, has recently formed a bullish divergence i.e. it has made a higher lower while the GBP/USD has formed a lower low. This suggests therefore that the bearish momentum may be weakening in the short term and that a bounce back may be on the cards. That said, the Cable has already rallied some 100 pips from its low today, so it may start heading lower from the currently levels again. At the time of this writing, the GBP/USD was testing the key 1.5080 level which was formerly support. The area around this level could turn into resistance now, and cause the GBP/USD to fall back – potentially all the way to 1.5000 and lower. Meanwhile a closing break above 1.5080 could pave the way for a rally towards the next important resistance at 1.5200 or even 1.5265.