GBP/USD has been moving broadly sideways since the January lows, tracing out a rough range between 1.38 and 1.46.
More recently the pair started pushing higher within the range, until the release of US Non-Farm Payrolls on Friday beat expectations, lending support to the dollar, and pushing the pair back into the centre, to trade at 1.4183 at the time of writing.
Non-Farm Payrolls - known as NFP’s - measure the number of new workers added to the economy in the previous month. y
They are an important statistic for the financial markets as they are one of the best barometers of the health of the US economy and the US Federal Reserve’s primary reference point when it comes to raising interest rates.
From a currency perspective, they have an impact on the US Dollar because they affect interest rates, which tend to rise with inflation, and the more people who are in work, the higher inflation tends to get as those people spend their wages.
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Higher interest rates support the dollar since they attract more foreign investors seeking higher returns. Those foreign investors exchange their money into dollars leading to higher demand and therefore higher ‘price’ for the dollar.
NFP’s Stay Above 200k
Whilst the Non-Farm Payrolls result was only 10k above the 205k forecast by most analysts, it was nevertheless a beat, and above the key 200k level. The previous month was also substantially revised up.
Several notable analysts had speculated the result might disappoint substantially due to recent sharp divergence with underperforming ADP employment change, since the two tend to track each over time so divergences are normally righted.
However, this was not the case in the end, after NFP’s for March showed 215k new vacancies were filled.
The continued strong labour market data increases the chances the Federal Reserve will not go back on their promise to raise interest rates again this year.
Recent comments from Chairman of the Federal Reserve, Janet Yellen, revealed a new caution in raising rates, which pushed the dollar lower, however, she did say that the decision would mainly be based on how good data was.
The better-than-expected NFPs will be viewed as good by Yellen and her fellow Fed policy board members, increasing the possibility they may raise rates sooner – possibly in June - than many pundits have suggested.
GBP/USD gained fresh momentum lower
The result pushed the GBP/USD exchange rate down by about 150 points from the day’s open at 1.4355.
Notwithstanding the fact the pair has been in a sideways range since January before then it was in a down-trend, and in the absence of a reversal in the trend, the downside bias remains.
The NFP down-move could be the start of a resumption of a longer-term bear trend.
It remains our base case that more downside will emerge until such a point as a new up-trend or other strong sign occurs to change that conclusion.
Therefore, a break below the minor trend-line at roughly 1.4130-40, confirmed by a move below 1.4100 would be expected to spark a continuation down to a target at 1.4003.
A clear break below the S1 monthly pivot at 1.4003 would be required to confirm further downside, as monthly pivots pose an obstacle to down-trend as they are a point where traders tend to cluster buy orders en masse in expectation of a bounce or reversal.
As such a clear break below the S1 would be required to forecast more downside to the next target at the 1.3835, February 29, 7-year lows. Such a break would need to clear below 1.3950 to gain confirmation.
GBP/USD pair is showing early signs of a major bullish reversal – 1.5000 in sight.
The outlook, however, is complicated by the fact that the GBP/USD’s daily chart is showing signs of a broader reversal potentially developing.
Whilst it is too early to be certain it is worth noting, in case the exchange rate starts pushing higher within the range again.
The chart featured above, shows the reversal pattern, known as an ‘inverted head and shoulders’ forming at the lows.
It has been highlighted in red and labelled, and is composed of a trough (the first shoulders or ‘s’) a small rally before another lower trough labelled ‘H’) and then another rally, followed by a final trough, labelled ‘s’ again, composing the right shoulder.
The buying volume spikes circled in the lower pane provide supporting evidence for the validity of the pattern.
A break above the neckline at the February 4 highs of 1.4668 would provide confirmation of a breakout higher, with an initial target at the 61.8% extrapolation of the height of the pattern at 1.5000.
The progressively stronger MACD - a momentum indicator - in the higher of the two indicator panes, backs up the possibility the trend could reverse and move higher.
However, despite all these early signs, until the neckline at 1.4668 is breached the pair is still technically in a longer-term own-trend with expectations of a break below 1.4100 leading to further downside as outline above.
Indeed, a break below the minor trend-line at 1.4130-40, confirmed by the move below 1.4100, would invalidate the inverted head and shoulder pattern, removing the bullish threat.
Data Hot-Spots in the Week Ahead
The week will be dominated to certain degree by the release of the Fed’s March 15-16 meeting minutes on Wednesday April 6.
Analysts will concentrate on whether there is a more optimistic bias to the minutes than was reflected in Janet Yellen’s recent more cautious comments at the Economic Club of New York.
If the minutes show signs the Fed is closer to raising interest rates this will further boost the dollar after Friday’s strong NFP result.
“We expect the minutes to sound somewhat more hawkish than Yellen's recent remarks, potentially catching the rates market off guard, if for no other reason than more hawkish views will be represented.” Say the FX team and BofA.
Other data highlights include the ISM Non-Manufacturing Composite on Wednesday April 6, which is forecast to rose to 54.0 from 53.4 in March.
Further commentary from Chairman of the Fed Janet Yellen on Thursday - as well as former Fed Chairs’s Alan Greenspan, Bernanke and Volcker may also cause volatility if a cautious stance appears to be the consensus.
