By: Christopher Lewis
The GBP/USD pair fell on Wednesday as traders attempted to break down the pair. The Pound in general looked very weak, and was even beat up by the lowly Euro. The pair is a barometer of global risk quite often, and stocks did have a rough day on the whole, so this move wasn’t completely unexpected.
Having said that, the size of the fall was quite telling. The UK is highly exposed to the European Union, and with the EU going into recession, the UK exports that go to that market will certainly suffer as a result. A full 30% of British exports end up in that area, so this will of course do some damage to the economy. Adding to that bit of pressure is the fact that the British banks are well-known to be exposed to a lot of European Union sovereign debt. Both of these issues are going to hurt the Pound over the long run.
The British are also going through austerity, and this will more than likely continue to stifle growth in the kingdom. The Bank of England is meeting during the session, but most analysts suggest that any attempt to boost the economy won’t happen until February. With that in mind, the markets do tend to look forward, and may be trying to discount printing at this point.
Significant Area
1.53 is a massive spot in the pair. The level is the bottom of a 200 pip support zone, and this area was tested during the session on Wednesday. The level did hold, but just barely. The daily close is going to be about 25 pips above that level, but the candle is closing towards the bottom of the daily range, and this suggests that the pressure is very real in this pair.
.png "GBP/USD Daily 1/12/12")
If that level gives way, it would signal a breakdown of the neckline in a massive head and shoulders pattern on the weekly chart. This pattern measures for a move down to roughly 1.40, and at that point I will be selling aggressively. I will only consider this pair broken down if we close on a daily chart below the 1.53 level, and I will scale in as I think this could take several months to play out. However, I will not hesitate as these types of trades don’t come along every day. As for buying, I wouldn’t consider it as the grind has been getting lower. If we bounce a bit – I will be selling on weakness above.