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GBP/USD Ahead of UK Inflation Report and BOE King's Comments

Basil Fayadh from eToro USA at 02/09/10


GBP/USD is staging around key levels ahead of major U.K. data due to come out at 4:30 a.m. and 5:30 a.m. EDT respectively on Wed, February 10th. Due out at 4:30 a.m. EDT is manufacturing production expected at 0.4%. The series is released every month about 40 days after the month ends and is the change in total inflation-adjusted value of output by manufacturers. The last two numbers in the series actually came out at 0.0% (flat) against expected positive numbers, with the last positive reading in November around 1.7%, (expected at 1.1%).
At 5:30 a.m. EDT the quarterly inflation report is due out accompanied by a speech from Mervyn King. King is the head of the central bank of England which controls interest rates and this has a direct impact on revelation of monetary policy in the country. The BOE’s projection for inflation and economic growth over the next 2 years is included in the report that is due out but more important are if King’s statements are seen to be “hawkish” or “dovish” (see below) after the report is issued. A recent report from Simon Johnson who is the ex IMF chief economist released on the BBC network has stated that spending in the UK “may not be sufficient enough to boost its economy." The United Kingdom has been consistently negative for 6 of the last 7 quarters, so not officially in a recession anymore (since the last number was positive), but this report should set out some clear direction for the pair.

GBP/USD is currently trading just above 1.5700 with near term resistance (R1) at 1.5745 which incidentally  as seen on the chart was the high from earlier today, with next resistance at 1.5800 (R2) seen at 50% Fibonacci retracement and lastly resistance around the 200 Hour Moving Average around 1.5850/60.  All of these Fibonacci levels hover just around old daily support which was just breached at the current price around 1.5707 and looks like the low on 10/13/2009 on a very large daily consolidation pattern for the pair from a break up through that level on 05/19/2009.  

I think the key to watch for is a hold of resistance to establish a new downtrend on the pair back towards those levels seen toward the beginning of last year, and also to establish the greenback’s strength against Sterling weakness in the near foreseeable future.  Let’s see if the data holds true to King’s speech later today and also any USD strength later in the week after unemployment numbers and Federal Reserve Chairman Ben Bernanke’s testimony before the House Financial Services Committee later this week on the unwinding of Fed liquidity programs and economic recovery.

Terms :
Moving Average -Moving averages simply measure the average price or exchange rate of a currency pair over a specific time frame. For example, if we take the closing prices of the last 10 days, add them together and divide the result by 10, we have created a 10-day simple moving average (SMA).
The price level in which a currency pair has difficulty trading above. At resistance, price action tends to stall before breaking above, or reverse in the opposite direction.

In technical analysis, key support/resistance levels are used as buy and sell signals when markets are ranging. Generally, the strength of support & resistance levels are measured by how many times the price reaches a specific level, but fails to break through. Also should a level have been tested a number of times previously, traders will often watch for a breakout to come.

The term refers to the predatory, stern nature of the hawk. In finance, hawkish refers to a negative outlook on inflation, implying that price levels are too high. "Hawkish" is an adjective typically used to describe monetary policy which favors higher interest rates, tighter monetary controls and restrictive credit policy.

Officials are referred to as being "hawkish" when they emphasize the dangers of inflation rather than focusing on the need for growth. "Hawkish" stands in contrast to "dovish" which emphasizes a more accommodative monetary policy.

Dovish-Dovish refers to an economic outlook which generally supports lower interest rates. Doves take the position that inflationary pressures are low enough for low interest rates to be desirable

'Dovish' is typically used to in the context of describing monetary policy actions and outlooks.

For example, if a central banker were to state that the affects of high agricultural costs are unlikely to be felt in wider inflationary indices, then those comments would tend to be described as 'dovish.'

Dovish is similar to bearish. But where bearish describes a pessimistic outlook for a market or security, dovishness describes an optimistic (low) inflationary outlook.

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All of the literature in this post is strictly opinion and is in no way supposed to be evaluated as trading advice or recommendations.

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