By: Christoopher Lewis
GBP/USD sank for the first part of the Thursday session, but found its footing later to bounce back in the end. The 1.53 level is massive support, and the fact that we formed a hammer at that level suggests that we are not quite ready to fall apart in this market yet. The level giving way would be a massive sell signal, but we simply haven’t gotten it yet as we couldn’t close below it.
The hammer is formed as the Dollar got a bit beat up for the session. The “risk on” trade came back after a decent set of auctions in the bond markets out of Italy and Spain. The United Kingdom is highly exposed to the European Union, and good news out of that region is good news for the UK and Pound as an extension. The UK banks are knee-deep in sovereign debt on the continent, and as a result tend to do well when the EU does. Also, the UK sends over 30% of its exports into that area. If the EU were to implode, it would have dire consequences in Britain.
The news out of America wasn’t all that encouraging for the session either, adding further upward pressure on the pair. While the Dollar is typically a “safe haven” currency, the fact is that some of the Dollar strength was also based upon economic strength in relation to the rest of the West. The fact that December retail spending came out at negative, once autos were removed, shows a severe sign of weakness as Christmas couldn’t even get spending to expand.
Double Bottom, Or Just a Pause?
The chart looks like it has attempted to breakdown yet again. The 1.53 level is the neckline on a much larger head and shoulders pattern in the weekly timeframe. The breaking down below 1.53, which we did do for a moment in the session shows real weakness, however the fact that we couldn’t stay under there would have me worried about being short at this point. The hammer for the session also suggests a bounce is coming, and we are certainly at the right place to see one.
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The MACD is diverging from the recent plunge in pricing, and as a result we have yet another reason to think a bounce could come. However, I am not convinced that the recent fall wasn’t legitimate. I will be looking for weakness to sell. I have two signals – a weak candle closer to the 1.55 level, as it was an area that we saw many reactions at recently, or a daily close under the low from Thursday as it would show continued pressure. I am not looking to buy until we can get well above the 1.58 level, which was the recent resistance in the big consolidation area this pair stayed in during the end of 2011.