Charting the GBP: Due for a Correction

The British pound is currently enjoying its longest rally since July of last year. Nine straight days of gains has taken the currency from 1.54 to a high above 1.60. When a move in a currency pair becomes this overextended, it screams for a correction. Whether this correction is large or small really depends on the catalyst but when it comes to the GBP/USD, the correction is rarely less than 100 pips. Over the next 48 hours, there are TWO potential catalysts for a turn in the pound – Chinese data and UK retail sales. Weaker than expected Chinese economic data could easily trigger a wave of risk aversion that sends investors flocking into the U.S. data. Even if the data is good, retail sales on Friday could be bad – winter storms took a meaningful drag on consumer spending according to the BRC retail sales report. Should the GBP/USD fall, support will be at 1.5850. As long as this level holds, the uptrend will remain intact. Higher inflationary pressures provide fundamental support for the rally in the pound so the currency pair will not give up its gains easily.

Anyone have their tin hats on?

2 Comments

  1. I agree with you Kathy that a correction is due. Furthermore I believe it could be back to the 1.55 area. It is hard to find anything substantial to support this latest run up. It would appear to be that hopes for an interest rate rise to combat rising inflation is behind the runup. But the BoE is between a rock and a hard place. They dare not raise interest rates as this could easily tip the UK back into recession. Also they know that inflating away UK debt and devaluing the currency is the only way the UK will balance its debt mountain. Medium term there is rising unemployment, rising inflation and anaemic growth in prospect. We may have to wait till the grim news in Feb is announced and the dreamt of rate rise still doesnt come for the down trend to resume. And yes, my tin hat says dont expect much joy from countries with debt mountains and persistent deficits.
    keep smiling.

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