Chinese weakness pounding the pound

January 7, 2016 09:32 AM

Another crash in Chinese equities has hit risk sentiment across the board, leading to a big safe haven bid as we move through Thursday’s U.S. trading session. Unfortunately for GBP bulls, the pound appears to be one of the biggest casualties once again.

Economic data out of the UK was actually decent, if not particularly important, this morning: the country’s Halifax Bank of Scotland Home Price Index rose by a healthy 1.7% month over month, easily exceeding expectations of a 0.5% rise. Before you go popping champagne bottles though, note that this report is historically volatile on a month-by-month basis and housing prices are frankly not something traders are watching closely right now anyway.

Indeed when it comes to GBP/USD, it feels as if traders are only focused on the recent downtrend. For months, we’ve been highlighting the long-term rounded top pattern that formed over the second half of 2015. Throughout that period, GBP/USD traded in a consistent pattern, dropping to a marginal new low before rallying 300-500 pips to just below the most recent high and rolling over to set a new marginal low once again.


That pattern broke down heading into the holidays a few weeks ago, when GBP/USD made a new low, but only saw a lackluster 140 pip rally heading into Christmas. Since then, the pair has sold off for seven consecutive days, and a close near current levels would mark the eighth. Earlier today, the unit peeked below the 1.4570 to hit a fresh 5.5-year low, though rates have since tracked back to that key support level.

Not surprisingly, the MACD indicator is trending lower below both its signal line and the “0” level, showing strong bearish momentum, though the RSI is in oversold territory at 25. While a bounce off the key support level at 1.4570 is a definite possibility (especially if tomorrow’s Non-Farm Payrolls report prints below 200k jobs), the medium-term trend will remain to the downside as long as GBP/USD holds below the Christmas high at 1.4950. Meanwhile, if the 1.4570 floor conclusively gives way, bears could look to target the mid-2010 lows in the 1.4200-1.4300 zone next.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.