Quid Report, Volume 62 9 May 2016 QUID REPORT. A comprehensive report on major GBP currency pairs

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1 QUID REPORT A comprehensive report on major GBP currency pairs As the polls continue to reveal majority sentiment in favor of remaining in the European Union, some consolidation of Brexit-induced weakness is starting to take root. The GBP continues to gain strength, but unlike last week, this strength is not across the board. While this strength is simply consolidation, this week pound sterling strength may look to become a stronger breakout with some currency pairs. In some pairs, this will be a selling opportunity as the strong bear trends in sterling may necessitate a deeper correction higher. Short-term traders will look to trade these large, consolidative rallies while long-term traders wait for new shorts to set up at higher levels. As it consolidates recent losses, the pound sterling trades with a bullish bias in the short-term. The Bank of England (BoE) continues to watch inflation despite weaker than expected average earnings. If wages growth can continue to grow, the BoE may become more staunchly hawkish to ward off inflation. Though the BoE has made no moves on interest rates, the BoE did change their position on monetary policy back in March. The BoE is calling again for monetary tightening and a higher path for interest rates citing inflation woes. This is a complete change in rhetoric yet again from the BoE. Unlike the Federal Reserve under Chairwoman Janet Yellen, the BoE under Governor Mark Carney has been a bag of nerves and inconsistencies since volatility has increased in commodity and financial markets last year. The BoE has changed position on monetary policy so many times that it now has to be careful not to loose credibility with the markets. This new trading week is busy this week out of the United Kingdom (UK). The event risk of the week for With weakening economic data and fundamentals, it is very likely that the BoE changes its hawkish stance back to dovish as soon as this week. the pound sterling is the BoE monetary policy announcement. There have actually been whispers of the BoE introducing negative interest rates. This is pure speculation, however, until it is not. Such a surprise should result in weakness in the pound sterling. However, markets have seen with the euro and Japanese yen where negative interest rates have resulted in currency strength. With weakening economic data and fundamentals, it is very likely that the BoE changes its hawkish stance back to dovish as soon as this week. So it is not outside the realm of possibility that the BoE shock markets Copyright FM Capital Group LLC. All rights reserved. 1

2 with negative interest rates. The market continues to move in anticipation of hawkish sentiment or action from the BoE until it gets more confirmation that the BoE will dial back its hawkish rhetoric yet again. Any accommodation of monetary policy will catch the market flat-footed and accelerate sterling weakness with great volatility. However, if the BoE makes no change in monetary policy, the pound sterling may rally in relief in some pairs before being met with sellers in other pairs. Copyright FM Capital Group LLC. All rights reserved. 2

3 EUR/GBP Resistance Friday Close Support The break above the zone of resistance between the and levels during the rally actually sparks a larger reversal higher to the resistance level. However, after rallying for five months, it is time for the EUR/GBP to consolidate. The move toward the support level completed this consolidation period only to as low as The support level also has confluence with the 38.2% Fibonacci level of the entire five-month rally. For as long as the EUR/GBP closes the trading week above the level, the EUR/GBP bias remains bullish. In fact, for the EUR/GBP not to move to the support level or the Fibonacci levels is a very Copyright FM Capital Group LLC. All rights reserved. 3

4 bullish development for this large timeframe. Bullish price action is confirmed on a rally to new highs above the resistance level. Trading remains bullish bias in the new trading week. Despite the close below the level, buyers continue to step in on these dips lower. The EUR/GBP is very likely to continue higher to break above the resistance level. A break above this zone of resistance targets a continuation of the rally to resistance between the and resistance levels. The recent consolidation in the EUR/GBP was signaled ahead of actual price action by the bearish divergence between price and momentum. Though this reversal was supposed to target the spike low, as signaled by the bearish divergence, the breakdown in momentum was completed by the move to lows on the RSI. Therefore, when the EUR/GBP found support ahead of the key support level, this actually signaled very bullish price action ahead. With no close below the support level, buyers will continue to move into the EUR/GBP instigating the next push higher above the highs. However, during the rally off the lows, the EUR/GBP found resistance at the top of the zone of resistance at the resistance level in trading last week. The EUR/GBP moved significantly lower to the bottom of the resistance zone. The subsequent hold of the bottom of the resistance level keeps bulls in firm control of price action to start the new trading week. The break above this resistance zone continues to signal a larger reversal higher to the resistance level. Copyright FM Capital Group LLC. All rights reserved. 4

5 Outlook for the week: This week is another busy trading week out of the Eurozone. But the event risk of the week for the euro is the release of GDP and inflation reports from around the Eurozone. With already weak economies throughout the Eurozone, the strength in the euro could be a drag on those economies. While inflation data likely remains tepid, the economic output in the Eurozone may show to be severely hampered. Despite the weak economic data, however, the euro continues to attract buyers who believe that the European Central Bank is not easing monetary policy any further. While other central banks still look to take action, the inaction of the ECB is actually welcomed by traders despite the weak economic circumstances within which the euro trades. Therefore, moves lower will likely be met with buyers below the support level. Buyers will want to see the EUR/GBP hold above support level as the new trading week gets underway. Bids are set in the buy zone with stops set below the level. Buyers ultimately target the level on a rally higher; however, the level is the first target. Copyright FM Capital Group LLC. All rights reserved. 5

6 GBP/USD Resistance Friday Close Support The bullish divergence on the weekly chart is starting to play out with another bullish Friday close above the major psychological level. The consolidative rally aims to stage a continuation higher if buyers continue to bid the GBP/USD on the back of U.S. dollar selling. Despite its first Friday close below the level since 1985, the consecutive Friday closes above the major support level continue to confirm bullish sentiment in the GBP/USD. Despite the overall weakness in cable, the weekly chart is starting to form an inverse head-and-shoulders chart pattern that is another bullish signal. Coupled with the bullish divergence on the RSI, bullish momentum has rallied the GBP/USD as high as the former zone of resistance between and Last week, the Copyright FM Capital Group LLC. All rights reserved. 6

7 GBP/USD reached new highs at This was the first time that the GBP/USD has traded at these levels in nearly six months. Nevertheless, this rally has not signaled a reversal in the GBP/USD. Despite reduced expectations in interest rate increases, the Federal Reserve remains a hawkish central bank. But regardless of the fundamentals, it seems as if the GBP/USD requires further consolidation before making a sustained move lower. A close back below the support level will reverse the short-term bullish bias to bearish. A close below the support level this week will be the first early bearish signal for market participants. Economic data in the U.S. continues to be very weak. The non-farm payrolls report last week was the first disappointing release of the year. Though noteworthy, the number of jobs added to the economy last month was significantly less than what was expected. This weak jobs report makes sense in the midst of all the weak data that had been released prior, namely the weak GDP number, the weak retail sales, the weak manufacturing numbers and the weak inflation numbers. The weight of evidence points to a weaker U.S. economy. The Federal Reserve has stated concern for this weakening U.S. economy. The slightly dovish FOMC statement has been reason enough for the GBP/USD to break the range to the upside. Therefore, the GBP/USD remains bullish for as long as price remains above the support level. As the GBP/USD attempted to move higher, it had become range bound between the resistance level and the /50-support levels. However, trading last week saw the GBP/USD break out above the range to highs at The close above the resistance level confirmed the bullish bias and continuation of the rally to Copyright FM Capital Group LLC. All rights reserved. 7

8 the new highs. From there, the resistance zone becomes a key area for direction in price action. A break above the resistance level signals a rally higher into key resistance level. Instead, the GBP/USD found resistance in the resistance zone at The GBP/USD has moved lower and trades back in the range between and The bearish bias wins this battle when the GBP/USD closes below the support level. Outlook for the week: The economic calendar is very busy out of the United States this week. The event risk of the week for the U.S. dollar is the retail sales report. A weak retail sales report will rally the GBP/USD. If still trading in the buy zone on the four-hour chart, the GBP/USD may rally on the back of a weak retail sales report. As the new trading week gets underway, the GBP/USD continues to sink. The bearish divergence in the RSI has resulted in a strong correction of the recent rally. This week, the market decides whether the GBP/USD continues to the bottom of the range at the level or succumbs to weakening economic data and rallies back to the level. Buyers establish position at the 50% Fibonacci level and lower with stops below the 61.8% Fibonacci level. Bids target new highs above the highs. A break and close below the 61.8% Fibonacci level at confirms this bearish momentum and triggers offers for a move toward the level. Copyright FM Capital Group LLC. All rights reserved. 8

9 GBP/NZD Resistance Friday Close Support The Reserve Bank of New Zealand (RBNZ) surprised markets and cut interest rates by twenty-five basis points in March to stem the rise of the New Zealand dollar. That has proven absolutely useless. Last month, the RBNZ opted to make no changes to monetary policy, despite the rise in the New Zealand dollar since the March rate cut. However, the bullish divergence in the GBP/NZD has finally manifested in a rally off the lows to close the week just above the key resistance level. The Friday close is a bullish signal for this new trading week. This break back above the resistance level flips the bias in the GBP/NZD to bullish in the short-term. While the GBP/NZD can move as high as , the 61.8% Fibonacci level, the GBP/NZD is still poised Copyright FM Capital Group LLC. All rights reserved. 9

10 to move lower on renewed New Zealand dollar strength. The RBNZ hints for more monetary accommodation in the future seemed to fall on deaf ears at the time as the market bought the New Zealand dollar in the aftermath of the monetary policy decision. However, since that announcement two weeks ago, the New Zealand dollar has finally come under selling pressure. RBNZ Governor Graeme Wheeler is very likely to jawbone the New Zealand dollar further when he delivers two statements this week. In this new Fibonacci reversal move, the GBP/NZD move targets the lows at Furthermore, the GBP/NZD is also in a Fibonacci move lower since the rally peaked last year at the 61.8% Fibonacci level on the monthly chart. The weekly chart RSI shows that selling momentum remains at strong levels. These momentum levels support further selling in the GBP/NZD. In anticipation of Governor Wheeler s speeches, the market has supported the GBP/NZD on dips below the key level. The bullish divergence still has room to run higher as momentum remains in bullish territory even on the dip lower. As such, rallies are expected to complete the Fibonacci move on the daily chart with new highs above the highs. A break above those highs is expected to continue to rally to the major resistance and psychological level. This level also has confluence with the 50% Fibonacci level on the weekly chart. Given the sharp decline in the GBP/NZD, a rally to the level is still only a correction. It is likely that a move to, and even above, the key level is met with offers, as bullish momentum will undoubtedly exhaust at higher price levels. The major psychological and support level looms with extreme Copyright FM Capital Group LLC. All rights reserved. 10

11 importance for the downside. Ahead of the major psychological level is the key support level. The resistance level is the new level to watch to the upside this week. Outlook for the week: The economic calendar is fairly busy out of New Zealand again this week. The event risks of the week for the New Zealand dollar are the speeches delivered by RBNZ Governor Wheeler. With the RBNZ citing concerns with the economy, a weak jobs report will weaken the New Zealand dollar further and send the GBP/NZD higher. It is likely that dips will continue to be met with buyers ahead of Wheeler in anticipation of dovish comments. The market already knows how the RNBZ dislikes the strong New Zealand dollar. With building bullish momentum, high probability remains this week for a move to the support level. Sellers can place offers there in the sell zone marked by the Fibonacci levels over last bearish wave. Offers in sell zone on the weekly chart have stops set above the 61.8% Fibonacci level. Offers target the support level in trading this week. Copyright FM Capital Group LLC. All rights reserved. 11

12 GBP/JPY Resistance Friday Close Support Negative interest rates continue to be inconsequential to Japanese yen capital flows. With the intent to weaken the Japanese yen, the Bank of Japan (BoJ) cut interest rates into negative territory this year for the first time in history while at the same time expanding their quantitative and qualitative easing (QQE) program. This had quite the opposite effect with the Japanese yen strengthening nearly 2,400 pips in the aftermath of this exceedingly dovish monetary policy implementation. Interestingly, the decision to maintain this policy, when the market expected another expansion, has put a cap on the Japanese yen strength. The GBP/JPY is failing to move lower and make new lows below the lows. The Fibonacci move on the weekly chart is resulting in failed lows at the Copyright FM Capital Group LLC. All rights reserved. 12

13 and support levels. These failed lows signal a significant rally higher above the resistance level. The change in BoJ sentiment to an ultra dovish stance has not been enough to flip the GBP/JPY sentiment back to bullish. The Japanese yen simply refuse to weaken. Market expectations were too high at the level in the USD/JPY. Market participants expected direct intervention by the BoJ if price in the USD/JPY declined below the level. However, the ultra-dovish BoJ will actually tolerate the USD/JPY exchange rate to the level. This gives the Japanese yen room to move higher still without intervention. Until then, the GBP/JPY is more likely to weaken on the back of continued yen strength. With failed lows building now, the building bullish divergence in the GBP/JPY looks like it will play out. The bullish divergence signals a rally back to the resistance level that capped the rally two weeks ago. With price finding resistance now below the former support level, this is a strong bearish signal now in the GBP/JPY. As such, an initial break above the resistance level will be the first signal for a bullish move higher. A rally to new highs, however, does not change the bearish bias in the GBP/JPY. Rallies to and above the resistance level are likely to be met by sellers. With the GBP/JPY moving in a correction lower on the larger timeframes, the GBP/JPY has the potential to move lower into the large 61.8% Fibonacci level at However, for this current trading week, the GBP/JPY trades with a bullish bias. Copyright FM Capital Group LLC. All rights reserved. 13

14 Outlook for the week: The new trading week is busy out of Japan this week with little event risk for the Japanese yen. As the new trading week gets underway, the GBP/JPY has moved higher towards the level. Since rallies have, so far, been capped by the former support level, aggressive traders will look to sell the GBP/JPY at or into the level. These offers have stops set tight above the level. A break above the level signals a rally into the sell zone. Offers, however, should then line up ahead of the resistance level with stops above the 61.8% Fibonacci level based on the daily chart. The Fibonacci levels on the four-hour chart are provided for possible areas of resistance on a rally above the level with the understanding that a rally actually targets new highs because of the aforementioned failed lows. Sellers target the support level. Copyright FM Capital Group LLC. All rights reserved. 14

15 GBP/AUD Resistance Friday Close Support After trading below the level for the first time since 2014, the GBP/AUD is back in the channel above the level. After trading for a week within this previously former channel, market memory has proven to be very long. This channel remains a very defined area of reward in play again this week and this week to the downside. The GBP/AUD had been moving in this channel since price peaked at With the Friday close below the top of the channel, the GBP/AUD is now biased to move lower back toward the bottom of the channel. The break above the level gives the GBP/AUD a bullish bias in the medium-term. However, the channel may restrict Copyright FM Capital Group LLC. All rights reserved. 15

16 trading until there is a break back below the channel and the support level. The GBP/AUD is ultimately biased to the downside because it continues to trade in the larger Fibonacci move back to the lows. The GBP/AUD is expected to eventually break the channel to the downside for a continuation of the larger Fibonacci move lower. The channel top here has confluence with the 61.8% Fibonacci level and the resistance level. Therefore, the top of the channel is a key area for future direction in the GBP/AUD. The level is a key level for direction to the downside. The first Friday close back inside of the channel is a significant technical development. After nearly three months of decline, the GBP/AUD is finally consolidating the downtrend as it reaches a point of exhaustion. The March Reserve Bank of Australia (RBA) monetary policy meeting minutes reveal a central bank that is very balanced and slightly optimistic on the Australian economy. However, despite the strong labor market, markets were shocked to see deflation become evident in the Australian economy likely caused by the tenmonth rally in the Australian dollar. Both the CPI and the PPI showed lower prices in what should be an inflationary environment. In response, the RBA has finally retaliated against its strong currency by surprising markets with a cut in interest rates. The RBA cutting interest rates will continue to lower the Australian dollar as the RBA capitalizes on the weakened Australian dollar. The weak Australian dollar has fueled this rally sending the GBP/AUD back to the top of the channel. The hold below the top of the channel is a bearish signal for price action as the new trading week gets underway. Any rally to the top of channel will now be met with offers above the level. The Copyright FM Capital Group LLC. All rights reserved. 16

17 top of the channel has confluence with the 61.8% Fibonacci level making this area staunch resistance. A break and close above this resistance signals a reversal in the GBP/AUD. Instead, the GBP/AUD is finding resistance at the top of the channel. This hold of the channel top as resistance signals a move lower especially with momentum in overbought territory. Outlook for the week: The calendar is very light this week out of Australia with no event risk this week for the Australian dollar. The GBP/AUD is, therefore, left to trade the technical developments on the chart. Despite the rally, the Australian dollar may still gather strength. During last week s rally to the top of the channel, the GBP/AUD has developed a bearish divergence at the highs on the four-hour chart. This bearish divergence signals a drop in the GBP/AUD in the new trading week. Offers are set on rallies back to the top of the channel above and into the resistance level. Stops are set above the 61.8% Fibonacci level at Sellers target the bottom of the channel at the support level. Copyright FM Capital Group LLC. All rights reserved. 17

18 GBP/CAD Resistance Friday Close Support Despite the recent rally in crude oil prices, the fundamentals for the GBP/CAD continues to remain the same. The recent move higher in crude oil is simply consolidation of its massive losses over the last eighteen months. Crude oil has resumed its descent as markets come to realize that the supply glut will not be alleviated. Countries will continue to produce oil at current levels. These levels exceed demand and will, therefore, allow oil prices to remain structurally lower. As the market opened to this realization, crude oil prices plunged lower. In response to the plunge in oil, the Canadian dollar also weakened considerably despite the looser correlation to oil it has enjoyed the past several months. This looser correlation in oil prices is a direct result of the Bank of Canada Copyright FM Capital Group LLC. All rights reserved. 18

19 (BoC) decision to surprise markets by responding to the 2016 crash in oil with hawkish sentiment. This response is in stark contrast to their surprise interest rate cut in response to the 2015 crash in crude oil markets. As such, the GBP/CAD will continue to experience a sustained selloff as the Canadian dollar decouples from crude oil markets and strengthens on newly hawkish BoC sentiment. Moves higher in the GBP/CAD induced by weak oil prices will not be sustained. The GBP/CAD has completed the Fibonacci reversal move lower to the former lows at the support level. However, the GBP/CAD also has a bullish divergence building on the daily chart that signals a move higher to the resistance level. This bullish divergence played out this week as momentum broke higher into bullish territory and price broke above the resistance level. Evidently, the BoC is right to be concerned about rising inflation. Last month, the headline number and the core consumer price index were much stronger than the market expected. The labor market continues to stoke inflation with Canadian businesses hiring at a healthy pace per month. This is a subtle, yet important, underpinning for further Canadian dollar strength. As the data continues to prove the hawkish BoC correct, the market begins to price for tighter monetary policy. This Friday close above the resistance level signals further bullish price action in the GBP/CAD. The level, the bottom of the former range, is the key level to the downside while the level in now important for direction to the upside. The level is the top of the former range. Moves to the upside in the GBP/CAD will present selling opportunities. The GBP/CAD remains in position to fall further for as long as price remains below the level in the medium-term. Copyright FM Capital Group LLC. All rights reserved. 19

20 Outlook for the week: The economic calendar is extremely light out of Canada this week with little event risk for the Canadian dollar. The BoC does have concerns about rising inflation in Canada. If the GBP/CAD falls on Canadian dollar strength, the buyers are expected in the buy zone at and above the support level with stops set below the 61.8% Fibonacci level on the daily chart. Bids target the resistance and psychological level. Only a break and close below the support level invalidates the current bullish bias and flips the GBP/CAD back to bearish. If the level holds as resistance after the break, sellers pile in with stops above the level. Offers target the major support and psychological level Copyright FM Capital Group LLC. All rights reserved. 20

21 ENDNOTES Forex Factory, Interest Rates Could Go Negative, Bank Of England s Vlieghe Says, Trading View, FX Risk Disclosure Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The information contained in this report does not constitute individually tailored investment advice. You, and only you, are responsible for the trades or investment decisions you make. Maximum effort and priority is place on using reliable information. Authors have obtained all market prices, data and other information from sources believed to be reliable although accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The information contained herein is of the date referenced and the Authors do not undertake an obligation to update such information or any other opinion expressed for that matter. Opinions, forecasts and strategies are subject to change without notice and the price of any security mentioned may increase or decrease. The Authors may have long and/or short positions on the securities discussed herein. The analysis contained in this report is based on a number of assumptions and changes in such assumptions could produce materially different results. This communication is not intended to forecast or predict future events and past performance is not a guarantee or indication of future results. Copyright FM Capital Group LLC. All rights reserved. 21

22 Please remember that investing in securities and other financial products comprises risk which could result in the loss of the entire starting capital and beyond depending on the complexity and leverage of the chosen product. No liability whatsoever is accepted for any loss, whether direct, indirect or consequential, that may arise from any use of the information contained in or derived from this report, its contents and/or any service provided/advertised/offer through it. This information is intended for distribution only in those jurisdictions where such distribution is permitted. No refund is available for any service provided. Copyright FM Capital Group LLC. All rights reserved. 22