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Is the GBP/USD Ready For A Big Pull Back In The FX Market?

GBPUSD Lookout!

Markets dropped again on Friday with the Dow Jones Industrial Average posting a 0.7% decline whilst dollar yen retreated back towards 94. In fact the greenback was weak across the board on Friday as GBP/USD traded above 1.57 and EUR/USD moved towards the 1.34 level. AUDUSD also gained and currently trades around 0.957. Although there wasn’t an awful lot of economic data out on Friday, a widening of the US current account deficit to $106.1bn did add to worries over Fed tapering and left markets with a lot to do going into next week.

Week Ahead

The FOMC meeting will be the big item on the agenda next week as traders attempt to work out exactly when the Fed will begin to scale back their asset purchases. Any comments that point to an early withdrawal have the potential to create severe volatility in all asset classes – we only need to look at the sharp sell off in Japan last week to know this to be the case. Traders will therefore be hanging on every word Ben Bernanke says and will be watching to see what his current analysis of economic growth is and what his key metrics will be going forward.

As well as the Fed meeting, it is a busy week for economic data, with German ZEW figures on Tuesday as well as US and UK CPI figures. We have BOE and Fed meeting minutes on Wednesday and then the Swiss will decide interest rates on Thursday. Friday sees CPI data out of Canada but is otherwise quiet.

 

VIEW

With markets seemingly fairly fragile after a topsy turvy week, it is likely that Ben Bernanke will try to steady the ship on Tuesday and Wednesday. We may therefore get a slight return to normality next week. Nevertheless, it has the potential to be an important week for markets if the bank does take a different view.

 

EURUSD

While EURUSD has been strong of late, momentum looks to be slowing at these levels and volatility has picked up as the market moves towards the 1.34 mark. Traders appear to be taking profits here and there is a double top pattern developing on the hourly chart that signals a possible move downwards. Any weakness in equities and we could see a bid for the US dollar so that could be a catalyst in the weeks ahead

 

EURUSD 1 hour chart. Charts supplied by IG Index.

 

EURUSD Forex Chart

EURUSD Forex Chart

 
GBPUSD

Just like EURUSD, cable is beginning to look expensive at these levels and has shown signs of topping out having approached 1.57. Volatility has picked up in the market and the currency pair should be ripe for a move down from here. On a weekly chart, GBPUSD has now touched the 100 week EMA. Failure to break through this average and the market should be primed for a decent enough correction over the next couple of weeks.

 

GBPUSD weekly chart. Charts supplied by IG Index.

GBPUSD Forex Chart

GBPUSD Forex Chart

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