GBP/USD: Could test 1.5120 this week

The GBP/USD pair recovered from the low of 1.4633 post the unexpectedly dovish Fed policy statement released last week. The pair clocked a high of 1.5122, before it was hit by fresh bets of a delay in the interest rate hike after the Bank of England (BOE) economist Haldane indicated the bank could be forced to cut interest rates to zero in order to tackle deflationary forces.

The British Pound is likely to strengthen this week, taking the GBP/USD pair higher to 1.5120 levels as –

1. Delay in the UK rate hike priced‐in – The British Pound has been under pressure since last ten odd sessions on increased probability of a delay in the interest rate hike. It all started after the BOE governor Mike Carney expressed concerns regarding the strong Pound, followed by similar tone of the BOE minutes released last week. BOE’s Haldane also followed suit last Friday. The repeated jawboning has been more or less priced‐in at least for the short‐term.

2. USD more sensitive to weak data post Fed – Throughout last month, we had seen the US dollar stayed resilient amid a string of weaker‐than‐expected economic data. Markets were convinced that strong jobs report alone was enough to push Fed closer to a rate hike. However, post the last week’s dovish Fed statement, the USD appears more vulnerable to a weaker‐than‐expected US data. A weaker‐than‐expected CPI release in the US this week (exp: ‐0.1 yoy), coupled with a weak durable goods orders figure is likely to trigger sharp weakness in the USD.

3. UK CPI relatively resilient – The year‐on‐year CPI figure is seen at 0.1%, compared to the negative print expected in the US. Moreover, the threat of low inflation could have been pricedin by the markets in the last ten odd sessions, since markets were repeatedly warned about the disinflationary impact of a strong Pound during the same period. Thus, a weak inflation print is unlikely to result in a significant depreciation in Pound.

On technical charts, the pair is well settled above the 23.6% retracement level of the down trend from 1.5550 to 1.4633 located at 1.4849. A break above 1.4983 shall open doors for our target of 1.5120. The hourly and the 4‐hour RSI have turned bullish. The break above 1.4983 shall happen tomorrow in case the UK CPI prints in line with the expectations.

In case of a big miss on the UK CPI data, we would be back to 1.4849 levels. However, it would take at least a 4‐hour closing below 1.4849 levels to result in further losses. So long as the pair trades above 1.4849, there is a high probability that the pair would rise to 1.5120 levels on the disappointing US data.

The rise anticipated at the current level of 1.4919 for a target of 1.512 provides an attractive risk reward ratio given the bullish view is at a risk of closing below 1.4850; which is 70 odd pips from the current level of 1.4919.