Power for the Pound Bulls

The Pound bulls went on a rampage yesterday, with the GBP punishing the majority of its trading partners following UK retail sales being announced much higher than expected. Aside from inflation risks, the UK economic outlook is extremely bright and this is very attractive to traders. The markets were provided with another subtle reminder of how strong the UK’s fundamentals are following the retail sales report, which also provided the catalyst for the GBP bullish momentum to accelerate yesterday. There were previously concerns that the UK economic revival was at risk to being over-reliant on its housing sector enhancing productivity, but consumers are now driving the UK recovery in a different ways with the combination of low inflation and rising wages providing a boost to retailers.

While the solid UK economic outlook will make the Pound attractive to investors, it is the inflation woes and continually pushed back interest rate expectations from the Bank of England (BoE) that will also limit Pound gains. The BoE have always contained dovish views on inflation, and that was even before the UK economy appeared at risk to encountering deflation risks. These dovish views are even stronger now and at present, I see a very limited chance of a BoE rate hike before the end of the first half of 2016. Due to the contrasting economic outlook, I do see the Pound continuing to advance against the Euro, but it will be at a slower pace than before and I am also expecting traders to begin taking profit on the GBPJPY now that it has reached a multi-year high.

Currency Markets

Elsewhere, the USD took a bit of a crushing against its trading partners following US economic data continuing to expose the fragilities within the economy. Even the most ambitious of traders can’t realistically be expecting the Federal Reserve to raise interest rates in June and if data continues to weaken, interest rate expectations could be at risk to being pushed back beyond this year. One other factor that is more likely than not to be weighing on investor sentiment is that the FOMC minutes revealed very little indication at all regarding the time of a rate increase, which suggests that there is a complete lack of direction internally within the FOMC over when to raise interest rates.

With the sentiment towards the USD on the bearish side, there are opportunities for traders to look for and one of these is the USDJPY pullback. A lot of noise was made out of this pair reaching a three-month high at 121.471 but it was always destined to slip right back down and it has already declined by 80 pips to 120.664. This pair will continue ranging between 121 and 118 for quite some time yet, mainly because the markets are awaiting clarity from both central banks on monetary policy. Personally I think that the Japanese economy is progressing and while it might not be to the pace some would like, this will ease any pressure on the Bank of Japan (BoJ) towards increasing stimulus. With that in mind and the acknowledgement that the Federal Reserve will be in no hurry whatsoever to raise interest rates, I am strictly bearish on the USDJPY at 121.

There are other technical patterns taking place too, such as the possible top on USDCHF upside gains at 0.94. This pair has found stubborn resistance around 0.94 for about the past month and it is only when we close above this level, that the mindset will be more bullish. The 0.7290 area has provided a “double-bottom” for the NZDUSD, with this allowing the pair to rally bounce strongly to 0.7390. The AUDUSD is another pair to have recently formed a “double-bottom” pattern, with the Aussie finding its own stubborn support at 0.7860.

While the Pound rally was ignited by impressive retail sales, I mentioned earlier this week that the pair would not fall back below 1.55 anytime soon unless we closed below this level. This has not happened and with the FOMC minutes weighing on USD sentiment and the Pound bulls finding momentum from retail sales, the GBPUSD has managed to rally to 1.5693.