A Bernanke Hangover For GBPUSD As It Pulls Back From 1.6180
GBPUSD reached a high of 1.6183 after the Fed decision, surging 200 pips. The prospect of the Fed remaining on hold was only ever a distant possibility, so the market reaction was fast and furious.
After the Bernanke-sponsored party lasted into the wee hours, today asset prices are a bit more lethargic. GBPUSD has retreated from its highs, but the pullback has been shallow so far. Although GBPUSD over-stretched to the upside last night, we may have entered a new paradigm for GBP and there could be further upside to come.
The fundamental backdrop supports GBP:
- Post the FOMC the market rapidly pushed back expectations for a rate hike in the US from early 2015 to May 2015. The market now expects the BOE to hike rates before the Fed, according to the overnight index swaps curve, a good measure of market interest rate expectations.
- The spread between UK and US 10-year yields surged to its highest level in 2 -years, although it has pulled back this morning, it remains at elevated levels.
- The FOMC revised down its growth forecast for this year to 2-2.3% from 2.3-2.6%, whereas the BOE revised up its growth forecast for Q3 to 0.7% from 0.5%, the BOE also said that the data “tentatively suggested” that growth could remain upbeat in Q4.
In the very short term, retail sales and public finance data on Thurs and Fri could cause some volatility in the pound.
GBPUSD is looking extremely overbought on both short and long time frames, the bearish crossover in the hourly MACD suggests that we could see a period of consolidation with a bearish bias in the short term.
Key support levels include: 1.6115, a resting point from yesterday’s surge, then 1.6080 - 21-hr sma.
On the upside, 1.6150-70 is a key resistance level, it is the 50% retracement of the 2008-2009 sell off. If we get above 1.6180 - Wednesday’s highs - this brings into view 1.6380 - the high from 2nd Jan - attracted a wave of selling interest, and marked the start of a downtrend that lasted until March. This is a powerful level of resistance that we expect the market to respect.
Takeaway: Right now the pound is due a pullback, but any decline could be capped at 1.6080 in the short term. The fundamental picture still supports the pound, so there could be further upside in GBPUSD. 1.6380 is key long term resistance.
PS, Watch out for the debt ceiling and budget debate in the US Congress at the end of this month. No deal on the budget threatens to shut down the US government. In this scenario we could see USD gain safe haven flows, reversing some of the Bernanke-inspired weakness.