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GBP/USD – Pause or Bottom?
Over the next 24 hours, the British pound is in play with jobless claims and the Bank of England’s Quarterly Inflation report scheduled for release. Jobless claims are expected to decline at a faster pace, driving the unemployment rate down to 5.9%, its best level since September 2008. However the main focus for sterling traders will not be the employment but the Quarterly Inflation Report. UK 10 year bond yields are hovering near 2 year lows on the fear that the central bank could lower its 2015 growth and inflation forecasts. At this stage, the market is still looking for the BoE to raise interest rates in the middle of next year. Policymakers have been indicating the same but with low inflation and slow wage growth, they could afford to wait especially with growth slowing in Europe and China. The bottom line is that if their forecasts are lowered, GBP/USD will fall below 1.58 to a fresh 1 year low. If their forecasts remain unchanged and the minutes appear upbeat, 1.5791 will become a near term bottom for the currency pair.
Taking a look at the weekly chart of GBP/USD, 1.58 is the current support level for the currency pair and if that breaks, the next level to watch is 1.5720, the 61.8% Fibonacci retracement of the July 2013 to July 2014 rally. By the same token, resistance is at 1.60, which is not only a psychologically significant level but also the 50% Fib retracement of the same move. If this level is broken in a meaningful way, it should be a smooth ride towards 1.62.