GBPUSD Forms Bearish Pennant as the UK’s Troubles Come Into Focus

Summary:
• GBPUSD faces heavy selling pressure as the BOE turns dovish, on disappointing GDP data, and as companies risk bankruptcy thanks to Brexit.

The pound was under heavy selling pressure yesterday as bad news came from all fronts. GBPUSD dropped to an intraday low of 1.2960 before closing the day at 1.2987, down 45 pips from where it opened.

BOE Turning More Dovish

First, there was the news that the Bank of England (BOE) could be turning more dovish. Over the weekend, BOE Monetary Policy Committee (MPC) member Silvana Tenreyro said that she is leaning towards voting for a rate cut in the “near term”. This adds one more member to the dovish camp, which has been steady at 2 votes in the last two meetings where the BOE kept rates steady.

Disappointing UK GDP

Second, there was the disappointing GDP report which only affirmed Tenreyro’s statement. According to the Office for National Statistics, the UK economy contracted by 0.3% in November. Adding more salt to the wound was the 1.7% decline in manufacturing production for the same month. These two reports fueled concerns for the state of the UK economy. Consequently, they led market participants to ask the question, “When will the BOE cut rates?”

Brexit Weighing Down UK Companies

To make matters worse, the UK’s largest regional airline is reportedly asking for a bailout. Flybe, is reportedly in talks with UK government agencies to secure emergency funding. According to the company, Brexit has weighed down on its finances. It has been unable to cover most of its USD-denominated costs as it makes most of its income in Sterling. Remember that Brexit will begin on January 31 and UK Prime Minister Johnson is pushing for a stern deadline on December 31. This news has only raised more worries if it is enough time for British companies to adjust as the country divorces from the EU.

US CPI to Dictate GBPUSD Today?

Today, there are no reports due for release from the UK. We do, however, have the US CPI report due at 1:30 pm GMT. If the report comes in below the 0.2% forecast, the dollar could weaken and GBPUSD could trade higher. There’s also a general sense of risk appetite following the Phase One Deal being signed this week. The pound could benefit from the positive market sentiment if the UK’s troubles are pushed to the background, at least for today’s trading.

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GBPUSD Outlook

Remember the rising trend line that I pointed out on GBPUSD yesterday? The currency pair is currently testing it for support. Will it hold?

Well, a closer look at the hourly chart shows that a bearish pennant just materialized. Our forex trading course will teach you that this pattern is widely viewed as a bearish indicator. However, a close below today’s low around 1.2975 is needed before it can continue its move lower. If this does happen, the next support level is at 1.2915 where GBPUSD made lows in December.

On the other hand, a bullish close above the consolidation around 1.3008, could mean that buyers are still looking to push GBPUSD higher. There is near-term resistance at the falling trend line (from connecting the highs of January 7, January 8, and January 10. This price, around 1.3028, also seems to coincide with the 50% Fib level (when you draw the Fibonacci retracement tool from the high of January 10 to yesterday’s low). A strong bullish close at this level could mean that GBPUSD may soon be headed to its January 10 highs at 1.3090.