GBPUSD Outlook: Week of 3/2

by on March 3, 2014 6:25 am GMT

GBPUSD is looking to test key resistance near 1.6750, while price action has been trending upwards within an ascending channel on the weekly chart. Sterling has continued to outperform its peers. According to the Bank of England (BoE) Monetary Policy Committee (MPC) member Ben Broadbent, “the strength of sterling is really a reflection of the fact that the rest of the world, Europe in particular, hasn’t grown much.” Valid point. However, the pound’s strength could potentially be a negative point moving forward in the economic growth balancing act because it weighs greatly on exports and consumer spending being a primary driver.

Nevertheless, the economy is growing, and traders are anxious on getting a rate increase from the BoE. Interest rates have been such a focal point, the topic is almost mind numbingly redundant. BoE Governor Mark Carney has vowed not to increase rates until he sees fit, regardless of the unemployment rate. Unfortunately, there has been warning signs that remind me of the Federal Reserve’s playbook – equivocally low interest rates.

Critics of the central bank’s policies feel that the BoE needs to gradually increase rates as the economy strengthens oppose to dramatically increasing them over a shorter period of time. Monetary policy is directly tied to boom and bust cycles, and ultra-low interest rates for an ultra-long time grow the inevitability of a financial crisis – it is what caused the housing bubble in the United States.

Andrew Sentance, who was on the monetary policy committee from 2006 to 2011 and now senior economist at PricewaterhouseCoopers, said “the alternative policy of trying to hold rates down too low carries the risk that the adjustment of rates when it comes has to be sharp and more abrupt, delivering a shock to the economy which we should all be trying to avoid.”

Sentance drew upon parallels seen in the US. “we saw the consequences of this in the US in the mid-2000s when the Fed held interest rates at 1 percent for too long and then pushed them up quickly to over 5 per cent. That policy change was one of the triggers for the global financial crisis so the risk that I am warning about is not a trivial issue.”

Mortgage holders where saved from the slashing of rates, and kick-started a housing bubble, but low interest rates did a number to savers, too. According to the consultant group Mckinsey Save our Savers, They have calculated that savers have lost around £250 billion through a combination of lower interest rates and above-target inflation.

It would be said to see monetary policy, once again, ruin an economy.

The pound is heading higher against the greenback in early trade as the market is currently being hit by credit risks coming out of China. Analysts are saying that the Chinese swap activity is quickly drawing similarities seen just prior to the 2008 financial meltdown in the United States, and risk assets are taking a wallop.

GBPUSD is still trending higher in the ascending channel, but it looks as if price action is stalling below 1.6750 on the weekly chart. The RSI is at 66, but has consolidated between 61 and 70 for several months. The ADX trend strength is relatively strong, but the +DMI is stuck at current levels. In order to close above key resistance, GBPUSD will need to see a boost in momentum.

If broken, GBPUSD could have the ability to reach trend line resistance at 1.6911. Weekly support is found at 1.6630, 1.6530 and deeper support at 1.6350.

WK Chart of GBPUSD

WK Chart of GBPUSD

The United Kingdom has a series of PMI data throughout the week, including manufacturing, construction and services PMI. Thursday, the BoE will issue their rate decision that is expected not to change and followed by an MPC statement.