As we noted yesterday, the pervasive theme this week has been broad-based strength in the U.S. dollar (see my colleague Kathleen Brooks’ note from this morning for more). While this strength has been most apparent in currency pairs like EUR/USD, USD/CHF and NZD/USD, even the stubbornly bullish GBP/USD is showing signs of succumbing as we roll into Wednesday’s North American session.
From a fundamental perspective, this week’s data has been unanimously disappointing. Yesterday, traders got their first look at BBA Mortgage Approvals data for April. The report showed just 42.2k mortgage approvals, below both the anticipated 45.2k and the revised 45.0k from the previous month. The 42.2k reading represents an eight-month low in the figure, raising concerns that Britain’s housing market is losing momentum amidst stricter rules on mortgage lending. The UK economy took another body shot from today’s CBI Retail Sales survey, which came in at 16, only about half of the forecast for a reading of 36 and last month’s print of 30. With signs of concern on both the housing and consumer fronts, it’s no surprise that the GBP/USD is trading sharply lower today.
From a technical perspective, the GBP/USD’s uptrend is testing a key “make-or-break” level. Since November’s low near 1.5900, the pair has repeatedly found support at its bullish trend line (see chart); however, with today’s drop, that trend line is in jeopardy. Astute traders will also note that the 50-day moving average converges around the same level at 1.6760, making this area a critical pivot to watch moving forward. Beyond the price action itself, the lower high in the relative strength index and downward-trending MACD also indicate growing bearish momentum and raise the likelihood of more weakness from here.
Despite the confluence of bearish technical and fundamental factors, it may be prudent for short-term traders to wait for a confirmed daily close below the 1.6750-60 area before turning outright bearish – just yesterday, we saw a big reversal from USD strength early on to USD weakness in the afternoon. If we do see a close near current levels, bears may look to target the 100-day moving average and 7-week lows at 1.6655 next. A break below that level could expose previous support at 1.6500 or the 200-day moving average at some point in June.
On the other hand, a recovery back toward 1.6800 today would suggest that the support level will hold and point to a possible move back toward 1.6900 in the short term.