Pound Looking To Pull Back
Blackwell Global | Jun 13, 2014 12:08PM ET
Comments by Bank of England Governor Mark Carney yesterday sent the market into a Pound buying frenzy. As usually happens with large impulsive movements, we often see a pull back. In this case, the EUR/GBP has touched the bottom of a bearish channel and is looking to consolidate. A short term play is on the cards.
A potential bubble in the UK housing market has led BoE Governor Mark Carney to warn that rising mortgage debt could undermine the stability of the UK financial system. He also said that interest rate rises “could happen sooner than markets currently expect”. He is referring to the swap rates, which predict an interest rate rise in April 2015.
It is easy to see where the fears are coming from. Data released last week showed UK house prices jumped 11.1% from a year earlier, rising 0.7% in April. Mortgage approvals did fall in April, but 63,000 people were still approved. This is down from 77,000 in January, which was the highest level since 2008, and we all know what happened then.
This sent the Pound to its highest level in eight months against the Euro, with the EUR/GBP pair touching 0.7990. This is along the lower line of a bearish channel, whichhas acted as support as seen on the below EUR/GBP D1 chart.
The Pound has extended its self through previous levels of support, but has found it tough to breach the channel. It looks likely to pull back a bit before following the channel back down. The Stochastic Oscillator on the below EUR/GBP H4 chart shows divergence from the price action. As we can see this first orange block highlights a previous low on both the price and the oscillator, however, only the price goes on to post a lower low, the oscillator has a long way to go to make a lower low. If the oscillator turns to show positive momentum soon, this will be a bullish trigger and we could enter for a short term pull back.
Source: Blackwell Global
Any pullback from the pound is not likely to last very long as the long term outlook is very bullish for the pound, especially when interest rates begin to rise. The EURGBP is likely to follow the channel down, especially given the diverging monetary policy outlook for the Eurozone and the UK, so a play on the pullback should have a short term horizon.
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An entry on a pullback should only be taken once it is confirmed and breaks the immediate resistance, and the oscillator shows momentum swinging back up. Look for previous levels of support as potential targets for a pullback if it eventuates, such as 0.8022, 0.8031 and 0.8063.
Source: Blackwell Global
The EURGBP pair has extended down recently due to the comments from Governor Carney. The Stochastic Oscillator shows a possible pull back could eventuate for a short term play before the price continues to follow the bearish channel lower.
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