Sterling eyes key resistance against dollar

UK unemployment has now dipped below 7%, the initial threshold level the Bank of England introduced in August but reneged upon last month, which has seen GBP/USD well bid in early trade. 

The currency pair’s highs of 17 February, around the 1.6823 level, remain the key resistance to further upside for the pound at this point. It’s rather lucky for Mark Carney that he reined back on the forward guidance and, despite the degree of dovishness emanating from him and indeed most of the western central bankers, traders are watching this resistance level very closely for a break out opportunity.

The average earnings figure was probably the key catalyst for the move – it increased by 1.7% in the year to February, and is the first time the metric has been above the inflation rate (now standing at 1.6%) in four years.

Effectively trading in a bullish channel since the lows of 1.5878 in mid- November, a break through the top of today’s highs would target the 1.71 level for the pair. Both the daily and weekly relative strength index are showing some mild negative divergence, however, so it may be premature to expect a move higher today.

Trading at the top band of the 20-day Bollinger we may see a mild retracement on profit-taking if support comes in at 1.6725, with the 50-daily moving average coming in below that. Rising support come from the channel trend line around 1.66. Traders will be watching a host of US macro data later this afternoon including housing starts, building permits and industrial production.

More importantly, voting member of the Federal Open Market Committee Jeremy Stein will speak later. Mr Sten is something of a leaning dove and is stepping down as a governor of the central bank next month; his remarks are therefore likely to be frank and may well repeat his fears about risks to financial stability during long periods of low interest rates.

GBP/USD chart

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