The fundamental argument can be easily supported by browsing through the last 6 months worth of GBP economic data on Forex Factory's Calendar. Once the "Olympic Effect" wore off, the GBP numbers began to miss expectations. One of the main problems in the U.K. is the punitive tax rates. This problem has decreased general competitiveness and productivity and caused an exodus of businesses and employees in the finance and banking sectors. As Zerohedge reports here, jobs have become so scarce that it's even difficult to obtain a part-time job as a coffee barista.
Technically speaking, this is a clear breakout from the triangle pattern shown below.
The .50 fib retracement drawn here on the monthly chart had held really well until we recently broke through it.
Here's a closer shot of price action (a weekly chart) with multiple bounces off of the .50 fib
On the daily chart we have a clear break from the bottom of the range (1.5660) and a resulting 580 pip drop that occurred with very little consolidation. This suggests that there's scope for consolidation even though price has been dropping quickly so far and we feel trades to the downside still offer good risk to reward ratios.
As per our previous post on the GBP/USD we've highlighted an attractive setup that we'll look to play if the GBP begins to strengthen. The key arguments for GBP strength are:
- This is a "buy the rumor, sell the news" scenario. The rumors of a downgrade started flying when GBP/USD was trading above 1.6000 and now the UK's credit rating has just been downgraded.
- If the Euro keeps selling off, then EUR/GBP should continue its descent, giving the GBP underlying strength across the board.
- The variables we consider before taking a trade are always in motion; but right now we're looking at 1.5425 and 1.5500 as attractive resistance levels to sell into GBP strength should it run the price inefficiency beginning at 1.5315
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