GBP/USD Fundamental Backdrop

For the month of October, the UK public sector (see economic calendar below) spent more than it collected resulting in the fourth-highest borrowing in said month. The natural economic reaction behind elevated debt levels is to increase interest rates in order to compensate investors for the risk of default. Hence the immediate reaction by the sterling was to push marginally higher due to the traditional positive correlation between interest rates and currency strength. This being said, additional aggressive interest rate hikes are unsustainable for the UK economy in respect of recessionary fears and already elevated rates.

Later today, Fed speakers dominate the docket with the most aggressive being Mr. Bullard who will likely maintain the hawkish narrative seen over the last week or so. This could prompt further weakness in GBP/USD considering sustained concerns around the UK’s public finances.

GBP/USD Economic Calendar

Source: DailyFX Economic Calendar
 

Technical Analysis

GBP/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

Daily GBP/USD price action has been trading within a developing triangle formation and is looking to break out in the near term. Fundamentals suggest a push below triangle support towards the 1.1738 swings low and beyond but could be invalidated by the less likely candle close above triangle resistance.

Key resistance levels:

• 1.2000
• 1.1900

Key support levels:

• 1.1738
• 1.1500
   

Bearish IG Client Sentiment

IG Client Sentiment Data (IGCS) shows retail traders are currently SHORT on GBP/USD, with 54% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning, we arrive at a short-term downside bias.

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