After making supersonic gains in 2017, the European majors (EURUSD and GBPUSD) has lost substantial value in 2018. GBPUSD, after touching 1.4376 in mid Apr’18 (highest since BREXIT), plunged to 1.31 yesterday – a whopping decline of 8.8% in just over 2 months. With UK’s growth forecasts being downgraded regularly and confusion persisting regarding the so-called dividend on BREXIT, Cable suffered relentless selling pressure. The US Fed on the other hand kept its promise of increasing rates and dollar assets continued to be attractive – dollar index surged and Euro and GBP plummeted.
Bank of England’s monetary policy committee (MPC) provided the much needed relief to the British Pound. The decision (read: no change) on interest rates was already telegraphed well in advance. But for the always forward-looking financial markets, there was enough ammunition for a “change”. Out of the total 9 members of the MPC, 3 voted for an interest rate increase – signalling a gradual change in stance within the elite decision making body. The Central Bank further announced that it now plans to start reducing the size of its balance sheet when interest rates reach 1.5%, down from the previous guidance of 2.0%. GBPUSD surged more than a percent within hours after the announcements.
Technically, GBPUSD looks increasingly oversold. The momentum indicators are in the oversold territory. There are positive divergences in MACD, RSI and Slow Stochastics. On the daily charts, it has formed a Morning Star* candlestick pattern. After a prolonged downfall, such a pattern indicates a downtrend reversal.
My sense is that pessimism around GBPUSD is overdone and it should recover. There should be a move towards 1.36-1.37 (to say the least). If GBPUSD declines below the recent low of 1.31 and forms a new low, the above assessment will be annulled.
*Morning star is a three candlesticks chart formation. The first candlestick is a long, bearish candle indicating a large drop in price. The second candlestick is a small candle (bullish or bearish), indicating confusion and indecision. The third candlestick is a large bullish candle in which the closing price is above the mid-point of the first candlestick, indicating a large increase in price.