GBP/USD Daily Outlook Jan. 6, 2012

By: Christopher Lewis

GBP/USD fell during the session on Thursday as the consolidation area continues to contain moves by cable. The pair has been stuck between the 1.58 and 1.54 levels over the several weeks, and looks set to respect those areas going forward.

The British Pound is currently being beat up against many currencies as it is guilty by association with the European debt problems. After all, the United Kingdom is highly exposed to the European Union as the banks own a lot of EU debt, and the UK also sends 30% of its exports to that area. If the EU falls, there is almost no way that the UK won’t feel it. The recent flow of money out of Europe does favor the Pound of the Euro, but the situation in Europe looks like it is finally starting to take its toll as the markets are starting to punish the Pound, Franc, and anything else related to European geography.

The pair is also very risk sensitive, and as the risk appetite fell on the day, so did the rate in this pair. The Dollar is the ultimate safe haven currency, and as a result – you saw the Dollar rise against most currencies for the day. The Pound isn’t being pummeled overall, but it will always lose against the Dollar on days like we had on Thursday.

Grinding Lower Over Time

The pair is in consolidation as mentioned above, but the last few days have seen a subtle shift in attitude. The pair has recently been bouncing all the way back to the 1.57 to 1.58 levels, and then falling down to 1.54 or so. However, the middle of last week saw the pair make a new low at 1.5359 before bouncing. The bounce didn’t even get back to the 1.57 level – an often telltale sign that the bulls that have been supportive of the pair are running out of steam.

The 1.53 level is paramount in this pair. If we get a daily close below that level, we expect that the overall tone of the market will suddenly get aggressively bearish. The level is the neckline on a potential head and shoulders pattern on the weekly chart that would have this pair heading down to about 1.40 or so. With this in mind, I am selling rallies going forward, and will not buy this pair. Most of my trades lately have been shorter time frames as the range is so well-defined.