Trading Action in GBP USD May Be Indicating Major Top
The GBP USD surged to the upside overnight despite news that the U.K. economy shrank more than previously forecast. The U.K. Gross Domestic Product report showed that during the first quarter the economy suffered its biggest contraction since 1958. Weakness was seen across the board in the economy as everything from construction to services showed some sort of weakness.
The three-month long rise in the British Pound has defied most analysts who are in the same camp as Bank of England Governor Mervyn King who believes that the road to recovery will be long and hard. Even if the global economy is beginning to bottom, the U.K. economy still faces rising unemployment. This is a lagging indicator, but if unemployment continues to march higher then eventually consumer spending will suffer. If consumer spending falls along with confidence then the economic recovery may slow considerably.
Although the fundamentals do not support the 90-plus day rally, todays closing price reversal top is a sign that a major top may have been reached. Earlier this month the British Pound formed a pair of tops at 1.6663 and 1.6621. The subsequent break from the highest high dropped this market to 1.5801. The break was short in duration and never really attracted heavy selling pressure. The quick recovery from this bottom was a sign that this market was not ready to correct despite the build-up of negative fundamentals.
Following the release of the news regarding the U.K. Gross Domestic Product, traders drove the GBP USD through the two main tops to reaffirm the uptrend, but ran into selling pressure following the test of a major .618 retracement price at 1.6694. The actual high before the sell-off was 1.6743.
It may be premature to call a top in the British Pound, but the trading action is indicating that the selling is greater than the buying at current levels. A close under 1.6522 on Friday will put this market lower for the week and could signal the start of a major correction.
Once again sellers repelled the EUR USD as it attempted to run stops over the last main swing top at 1.4177. The subsequent closing price reversal top and close under a key retracement zone at 1.4042 to 1.4112 are indications that this break may have attracted some real selling pressure.
A follow-through to the down side tomorrow is needed to confirm the reversal top. If this pattern is verified, then look for a minimum retracement to 1.3950 to 1.3903.
The only indication that this market may be starting another leg down is the closing price reversal top. Traders may have been hesitant to buy strength today because of the European Central Bank meeting on July 2. Furthermore, news that Euro Zone prices fell, could be indicating the start of a deflationary cycle kept pressure on the EUR USD most of the day.
The ECB has room to cut interest rates but a few days before the scheduled meeting traders were content that they would leave interest rates unchanged. Now that the thought that the ECB may lower its benchmark rate has been tossed out there, sellers are showing up. News that prices dropped may also force the ECB to consider another stimulus plan to revive the economy.
The main trend remained up in the USD CAD as a downward reversal in crude oil prices weakened the Canadian Dollar. Weak Canadian economic news combined with a drop in U.S. Consumer Confidence also helped pressure the Canadian Dollar.
Technically, this pair is poised to continue to rally with a Main Top at 1.1813 the first upside target followed by a major 50% retracement level at 1.1922. On the downside, trailing retracement support comes in at 1.1289 to 1.1207. A test of these levels would not turn the main trend to down, but would instead set up a buying zone.