GBP/USD – Inverse head and shoulder ahead of UK labor data

Apr 20, 2016

GBP/USD breached falling channel seen on the daily chart in the NY session yesterday and tested supply around the inverse head and shoulder neckline hurdle. Prices clocked a high of 1.4419 before bullish move ran out of steam. The bird is losing height in early Europe today; now trading around 1.4350 levels.

Points to be noted heading into data release

• GBP bulls have been buoyed by latest Brexit polls showing ‘remain’ vote gaining an edge over ‘exit’ vote. UK TNS EU poll released today showed 38% in favor of ‘remain’, 34% in favor of ‘leave’. 28% still stand undecided.
  
  
  
• However, oil prices are losing ground today and that is hurting risk sentiment, courtesy of which Cable dropped to 1.4350 levels.
  

UK data due today is likely to show –

• Jobless Claims dropped for Fifth Consecutive Month in March
  
  
• Average weekly earnings including bonus to rise 2.3% 3M/y/y in Feb from Mar’s 2.1%
  
  
• Average weekly earnings excluding bonus to rise 2.1% 3M/y/y in Feb from Mar’s 2.2%
  

An uptick in the average weekly earnings including bonus may have been priced-in during Tuesday’s uptrend. Hence, it would take a better-than-expected earnings figure for markets to consider buying Sterling amid oil price drop. Moreover, a strong wage growth and labor market figure against backdrop of Brexit polls showing “remain” vote in lead means a less reason for BOE to telegraph a delay in the rate hike. This could help Cable cut through offers around inverse head and shoulder neckline level of 1.4402.

On the other hand, a weaker-than-expected wage growth and labor market data could add credence to the technical failure at neckline level of 1.4402 seen in Asia today and may open doors for a drop to 1.43-1.4250 levels.

Daily Chart

Pattern – Inverse Head and Shoulder

Resistance – 1.4368, 1.4402-1.4418, 1.4436-1.4459

Support – 1.4354, 1.43, 1.4255-1.4252

• GBP’s rebound from 1.4354 (23.6% of 1.3835-1.4514) could result in another re-test of inverse head and shoulder neckline level of 1.4402.
  
  
  
• When viewed against the backdrop of bullish break from falling channel seen yesterday coupled with bullish move in RSI, the pair appears more likely to chew through offers around 1.4402-1.4418 and make a move to 1.4459 levels, beyond which a stiff resistance is seen at 1.45-1.4514 levels.
  
  
  
• Conversely, a dismal data may trigger a drop towards 1.43 handle, under which 1.4252 (50% of 1.4669-1.3835) stands exposed. However, bears need to observe caution as fresh demand could be anticipated on dips as long as 50-DMA at 1.4227 remains a support level.