“Now turning to the elephant in the room” said Bank of England Governor Mark Carney mid way through his remarks on the Bank’s Inflation Report yesterday (May 12).
Carney went on to explain that the MPC views Brexit as a real risk with significant downside for the value of GBP and the strength of the UK economy, with the potential to cause a technical recession.
Helpful reporters later asked Carney to clarify what tools were at the BOE’s disposal to deal with such a scenario and although Carney refused to jump straight in to the trap, he could not help but mention lowering interest rates and resorting to QE.
These words are now attached to the GBP for the next six weeks until the Brexit cloud either lifts or delivers a bolt of lightning.
The initially positive inflation report boosted GBP temporarily but Carney’s comments and the following Q&A more than dampened that optimism, with GBP losing ground to safe currencies and only making modest gains against Aussie, Kiwi and Euro.
The market is taking the risk of Brexit seriously, and this will be a key driver for GBP over the next six weeks.
Those with a neutral to bullish short term bias on GBP have reason to pause for thought.
GBP Index as been gently bearish for several weeks, and has taken a stronger bearish direction since the BOE meeting.
Based on the fundamental cold water thrown on GBP yesterday the currency is unlikely to achieve a bullish break out of its current range in the short term.
Support is holding for the moment at 1.44 which is also approximately the monthly central pivot point (Chart A)
Bearing in mind fundamental mood, what is the bearish technical case?
Yesterday’s price action formed a lower high from the previous high at the end of April. This fits the 38.2 fib retracement which implies a 161.8 extension, roughly ending up in the lower range support at about 140.5 (Chart B).
However, D1 and H4 stochs are oversold and approaching oversold respectively, and we are still at that major mid range resistance at 1.44 suggesting a major bear move is not with us just yet.
I think we are left with a neutral to bullish technical alternative, based on a potential double bottom forming at the 50% fib level support, daily 55EMA still offering support and daily and H4 stochastic wanting to go up (Chart C). But if the week closes below the daily 55 (which might be driven by US economic data out later) the bearish scenario and trip down to lower range support needs to be considered for next week.
Overall the GBP index is not tanking across the board: if US economic data this afternoon is positive then GBP bulls should look elsewhere, perhaps AUD and NZD. However if it is weak, GBP has the potential to make some more ground against the USD.