GBP/USD: The hits keep coming for shell shocked bulls

Not quite a week ago, we noted that it may finally be “bears’ turn for a day in the sun” on GBP/USD, noting that the disappointing rally last Monday, followed by the big Dark Cloud Cover* candlestick pattern was an ill omen for the unit. Since that peak, GBP/USD has put in five consecutive lower closes, breaking below the widely-watched 50-, 100- and now 200-day averages in short order.

From a fundamental perspective, there is little in the way of an obvious catalyst. At the global central bank confab in Jackson Hole, Wyoming last week, Bank of England Governor struck a seemingly upbeat tone, arguing that downside global risks must be weighed against the strength of the UK economy. He noted that the UK’s direct exposure to China is “modest” but that further slowing in China “could impart further imported disinflationary pressures over the policy horizon.” In typical flowery British prose, he also argued that, “developments in China are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert.” In other words, the Bank of England still feels that it is on track to raise interest rates next year, perhaps even early in the year if the economy remains strong.

Based on the recent trade in GBP/USD however, traders seem skeptical of the central bank’s intentions. As of writing, the unit is trading at a nearly 3-month low near the 1.5300 level, and if that psychological level of support gives way, more downside appears likely; after all, the RSI is not yet in oversold territory. A close here could open the door for a move down to the early June lows around 1.5200 or even the start of the previous bullish trend near 1.5100. That said, disappointing US data could take cable back above the 200-day MA, though a sustained rally back above 1.5500 seems unlikely at this point.

* A Dark Cloud Cover is formed when one candle opens near the top of the previous candle’s range, but sellers step in and push rates down to close in the lower half of the previous candle’s range. It suggests a potential trend reversal.