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GBPUSD: The Bulls Bounce Back

16 July, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM

Just when it appeared like the GBPUSD bulls were taking a siesta, a ringing alarm bell sent the bulls back out again in full force. It was announced that In June, UK CPI (Inflation) accelerated to an annualised 1.9%.This is the UK’s highest CPI reading since January and came as somewhat of a welcome surprise to the GBP bulls. Especially after inflation levels decreased the month prior to an annualised five-year low, 1.5%.

For those who might not be familiar as to why this alerted the GBP bulls, the Bank of England (BoE) have maintained a threshold 2% CPI target to consider a possible interest rate hike for nearly a year. Within the past fortnight, both current BoE Deputy Governor Sir John Cunliffe and soon to become BoE Deputy Governor Minouche Shafik have each indicated that the exact timing of a BoE rate hike will be dependent on the UK economy’s capacity to grow, before it encounters inflationary pressures. A consistent 2% UK CPI level will likely be required for the BoE to begin raising interest rates.

From a technical standpoint, this unexpected bullish momentum encouraged the pair to register a new yearly high, 1.7189 before the price pulled back to 1.7142 (at the time of writing).

Looking ahead to today, as long as the correct fundamentals collaborate together, this rally might not be over yet. If it is announced this morning that the UK unemployment rate declined last month, alongside some risk appetite appearing in the FX markets later in the afternoon (if a dovish Janet Yellen appears in front of the US Senate Committee), perhaps an upside move towards the next major resistance level, 1.7250 might still be in the pipeline. The 1.7250 area is a valuation not touched since September 2008, while it also acted as a previous GBPUSD support level between February and April 2006.

In order for a GBPUSD upward advancement towards the 1.7250 milestone to materialize, the markets will need to react favorably to the UK unemployment report. Last month BoE Governor, Mark Carney strongly hinted that a UK unemployment rate below 6% might influence the BoE’s decision to raise interest rates.

Currently, the UK unemployment rate stands at 6.5%, although there is potential for the UK employment report to impress. For example, UK Services (which employs around 80% of the UK labor force), Manufacturing and Construction PMIs continued to showcase expansion last month. The news regarding Manufacturing PMI’s expanding to its highest level since January 2014 was particularly well received, because this sector previously had been highlighted as a potential target for UK job creation.

Another major contributor behind how high the GBPUSD can advance on this occasion will be dependent on the market reaction towards Janet Yellen’s testimony to the US Senate Committee. Yellen will more than likely be quizzed on her current assessment of the US economy, alongside when the Federal Reserve will begin raising US interest rates. Yellen is typically known for appearing dovish at live press conferences and if the Federal Reserve Chair appears to refrain from offering an indication regarding when the Federal Reserve will raise interest rates, risk appetite in the FX markets is a possibility. This would provide further momentum to the GBPUSD bulls.

Overall, I would admit to being surprised after hearing the UK CPI announcement. On Monday, the GBPUSD extended below the 1.7101 support level, which acted as a dynamic support level last week. I was weary that the GBPUSD rally to the upside might have been about to take a breather. However, the GBPUSD rally restarted very suddenly and anticipation will now be focused on the UK employment report. As long as the markets react favorably to the employment announcement, GBPUSD resistance can be found located at 1.7164 and today’s yearly high at 1.7189. In the event that the UK employment report fails to impress, last week’s dynamic support level (1.7101) will likely be revisited.

As mentioned above, the next major GBPUSD resistance level is located at 1.7250. This valuation might require some more time to reach, but the GBPUSD bulls are proving resilient thus far. By recording a new yearly high on Tuesday (1.7189), the bulls are slowly approaching this milestone.

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