Making sense of GBP and USD

In a curious trading week last week saw all the week’s most important U.S. economic reports beat expectation but we did not see the USD rally.

The most phenomenal part of the move was that it was counter to data and Fed speak. Nearly all of this past week’s most important U.S. economic reports beat expectations including consumer prices, retail sales, the Empire and Philadelphia manufacturing surveys, building permits and jobless claims. The only miss was in industrial production and housing starts. Most importantly, Fed Chair Janet Yellen made her intention to raise interest rates very clear. Going into her semi-annual testimony on the economy and monetary policy this week, some investors expected less enthusiasm from the Fed Chair in light of slower earnings growth and a higher unemployment rate but instead, Yellen remained committed to the central bank’s plans for tightening and said “waiting too long to tighten would be unwise.” She also indicated that rate increases (plural) in 2017 is appropriate and that “every FOMC meeting is a live meeting. This sentiment was shared by nearly all of her colleagues, but instead of rising, the dollar fell after her testimony. Kathy Lien [read here].

Traders are hard wired to react in a standard way to standard information so when positive news doesn’t generate the expected effect we have to stand back and re-evaluate the fundamentals.

The USD should be rallying. Why it is not, is unclear and we can only assume the markets are treading water awaiting Trump’s “phenomenal tax plans” to assess its likely impact on the USD.

Similarly, the GBP should be coming under more pressure. Last week saw almost every news release come in weaker than expected including a crushing miss on Retail Sales that came in at -0.3% against an expected 1.0%. This raft of news makes the slim likelihood of a possible rate hike sometime in Q4 even less likely and it seems inevitable that the key GBP/USD support at 1.2345 will be tested and will fail over the next few weeks or sooner.

But as long as this level remains in tact, there’s a fair chance the GBP will continue to move sideways inside the flag formation it is currently travelling in.

It looks only a matter of time before we sink lower but much depends on the weakness/strength of the USD. We seem to have a battle of the ugly sisters and which sister is most ugly.

This all makes trading even more problematical.

My approach is to find entries on the shorter time frames and trade with a tight stop and adjust the stops accordingly. If we are lucky enough to be trading in the right direction when the market mood shifts then we will reap a fine harvest. If we are not we should have safeguarded our account and we can wait for another trading opportunity.



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