GBP/USD Deflects Off Our 3rd Tier Trend Lines

The Cable pulled back on large volume yesterday as the Dollar appreciated across the board.  However, the GBP/USD’s losses were not technically significant as with the EUR/USD due to Britain’s relative strength economically.  The Cable now appears to be following our 2^nd tier downtrend line while trading comfortably above the psychological 1.60 level.  Additionally, the GBP/USD is well above June lows whereas the EUR/USD closed beneath their respective June lows yesterday.  The relative strength of the Pound is further exemplified by the overall outperformance of the GBP/JPY and underperformance of the EUR/GBP.  Investors are rewarding the Pound for Britain’s strong showing in economic data while it seems that the BOE has taken the more appropriate measures to fight the crisis as compared to the Fed and ECB.  Investors will get a better sense of how the British economy is faring in less than an hour upon the release of the nation’s year-over-year CPI and RPI data.  Additionally, investors will digest important pricing data from both the EU and U.S.  If the numbers signify deflation, we could witness further near-term strength in the Dollar.

Despite the relative outperformance of the Pound, the Cable is still facing some considerable downward pressure due to the currency pair’s positive correlation with U.S. equities.  The S&P futures are indicating there may be further room to go to the downside.  Investors are concerned that international governments will not continue to support America’s expanding burden of debt.  Furthermore, U.S. equities may be overvalued due to their impressive run in the first half of 2009.  The challenge for the Cable to the upside is presented in the form of our 2^nd and 3^rd tier downtrend lines.  While we could see a bounce today in the face of oversold conditions, the Cable may be forced to participate in the near-term downtrend we’ve forecasted in the EUR/USD, USD/JPY, and S&P futures.  Ultimately, as with other major Dollar pairs, the medium-term fate of the GBP/USD relies upon the ability of the global economy to follow through on its path to recovery.  Any broad-scale pull back in the global economy, or a retraction into the problems we saw in 2008 would likely kick the Cable back into its medium-term downtrend.  However, we have no reason to suspect this and the medium-term uptrend line remains intact.

Meanwhile, our 3^rd tier uptrend line is playing an important role as far as support is concerned.  If our 3^rd tier doesn’t hold, we could witness a sharp near-term contraction towards our 2^nd tier uptrend line and the psychological 1.60 level.  The rising volume yesterday to the downside is certainly a cause for concern and could be foreboding of an oncoming pullback.  As for the upside, the Cable will need to get above our 2^nd and 3^rd tier uptrend lines to have a chance at overcoming previous June highs.  We maintain our negative outlook for the short-term in the GBP/USD trend-wise due to the negative pressures in the global market place.

Present Price: 1.6335

Resistances: 1.6371, 1.6412, 1.6498, 1.6574, 1.6620

Supports: 1.6315, 1.6263, 1.6210, 1.6141, 1.6080

Psychological: 1.65, 1.60

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