The GBPUSD hit a four-year high against the dollar, marking a 503 pip increase since the current trend began on February 5. Market participants are bullish on the growth perspective in the United Kingdom as the Bank of England (BoE) revised their gross domestic product to 3.4 percent, up from 2.8 percent, in 2014.
Much of the growth has been seen in the housing sector with bolstering construction growth. The construction industry had an increase in output by two percent in December and 6.3 percent in 2013. However, the ever-inclining Sterling has a catch twenty-two: the higher Sterling gives the United Kingdom more purchasing power for imports which boosts consumption, but it dramatically effects exports which have are still below pre-recession levels. This creates an unbalanced path to growth.
The GBPUSD has increased for two factors, one fundamental and one of speculation. There is a fundamental divide between the economic data between the United State and the United Kingdom, weather or no weather. Sasha Nugent, FX strategist at Craxton FX, said “a combination of not-so-great US data and an upbeat economic outlook is driving sterling higher against the dollar.” This leads into the speculation. Traders know that if the economy continues to gain strength, the BoE has to eventually increase interest rates. On Wednesday, the United Kingdom will report their unemployment rate, which currently stands at 7.1 percent. BoE Governor Mark Carney has stated that unemployment at seven percent would be a key determinate on whether an interest rate hike is on the table, but he warned that a rate increase is not a sure thing based on unemployment alone.
There is a dilemma the BoE has, similar to the Fed. The market expects rate increases based on the repeated forward guidance that has been largely tethered to unemployment. Congress has already grilled Yellen on credibility issues surrounding the fact that the Fed doesn’t see interest rates increasing until 2015, while stating that the current 6.5 percent unemployment rate would be the primary nudge to higher rates. On the other hand, the British labor market looks to be a lot stronger than in the US. So, if Carney doesn’t raise rates after the target is hit, then there could be a massive pullback as a result.
The daily chart shows the pound’s stellar rally into multi-year highs, but 503 pips in seven trading sessions is quite a bit. A minor pullback leading into data releases this week is probable. The key levels of support to watch are 1.6660, 1.6565 and 1.6450.
Resistance levels would need to be analyzed on the five-year daily chart (current support levels extended for historical comparison). The first level of resistance will be the top of Friday’s range at 1.6754 with 1.6815 above that. If the slew of economic data this week is positive, traders could see GBPUSD break through 1.6815 and trend up to 1.6915 on the highs of euphoria.
Although, traders are bullish based on the rate speculation, so a “sell the news” pullback may be in-store to lock in some profits. Nevertheless, the positivism in the data should continue the trend as a pullback is considered healthy in a move this large. Look for entry at key support levels.