GBP/USD pair spiked 1.4282 levels in the NY session amid holiday thinned volumes. US personal spending growth slowed more than expected, pushing the savings rate to one-year high. Core PCE also printed weaker-than-estimate, triggering a broad based sell-off in the USD. However, the resulting spike in the pair appears slightly overdone and should be treated with caution since the trading volumes were low.
This is because Brexit fears are still very much intact. Implied volatility on three-month sterling-dollar options soared to a six-month high on Brexit concerns last week. Furthermore, dollar weakness is slightly confusing given the Fed policymakers are repeatedly hitting the wires with their hawkish comments. Consequently, the spike in GBP should be treated with caution and a failure to sustain above 50-DMA could see bears regain control.
Eyes Yellen speech
The main event for the day is Federal Reserve chairman Janet Yellen’s speech. Markets expect the central bank chief will defend majority view of two rate hikes in 2016. Yellen may tilt slightly on the hawkish side, but in a way which would help markets prepare for a rate hike in June. This could see GBP/USD erase gains witnessed on Monday.
Technicals – Losses seen below 1.4213
Sterling’s failure to take out 50-DMA yesterday followed y another failed attempt in Asia, coupled with bearish RSI indicates the spot is likely to test rising trend line hurdle at 1.4213.
A break below 1.4213 would increase the odds of a drop to 1.4176 (5-DMA). A weak closing today followed by a break below last week’s low of 1.4057 would indicate continuation of downtrend that began from 1.4514.
Conversely, acceptance above 50-DMA would open doors for 1.43-1.4330 (23.6% of 1.5930-1.3835). A daily close above 50-DMA would do more damage to bears.
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