The GBP USD surged to the upside overnight despite news that the U.K.economy shrank more than previously forecast. The U.K. Gross DomesticProduct report showed that during the first quarter the economysuffered its biggest contraction since 1958.
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, today’s 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.