GBP/USD – Is there a scope for profit taking ahead of weekend?

Cable strengthened for fourth consecutive session yesterday after the data in the UK showed retail sales jumped more than expected in April. The BRC retail sales monitor had shown a sharp slowdown earlier this month, however, we had noted that unlike official data, it wasn’t seasonally adjusted.

GBP/USD dropped to a low of 1.4332 (almost 23.6% of 1.5930-1.3835) on Monday before resuming the upward journey. A moderate rebound in UK CPI was ignored by markets as FT’s poll of polls showed ‘remain’ vote in lead by six basis points. In recent weeks, the polls had shown a gap of 2-3 basis points. Sharp drop in Brexit bets led to a rally in Sterling and drop in gilts (rise in yields).

Mixed UK employment and wage growth data and strong retail sales data only added to Sterling’s appeal.

Scope for profit taking ahead of weekend

• Fed June rate hike bets have spiked from 4% to 40% over last one week or so as policymakers were out on the wires with their hawkish comments and Fed minutes talked about June rate hike. However, upbeat UK data and falling Brexit bets helped Sterling remain resilient. Now that markets have priced-in both, investors may chose to unwind Sterling longs on US rate outlook.
  

• The second reason is chart driven. A look at hourly chart indicates a bearish price-RSI divergence, followed by a bearish break in RSI.
  

• Nevertheless, it is worth noting that Cable has breached a larger falling trend line on Wednesday on day end basis. Consequently, profit taking/correction could be seen, although support at 1.4549 is likely to remain intact.
  

• A rebound from 1.4549 could be followed by a break above 1.46 and move to strong hurdle at 1.4636 (38.2% of 1.5930-1.3835).
  

• Only a day end closing above 1.4636 would signal continuation of rally from Monday’s low of 1.4332. Meanwhile, bullish invalidation is seen if prices end the day below 1.4549 (larger falling trend line support).