GBP/USD – Fails Below 1.40, Is 1.37 Next

After seven straight days of gains, we’ve finally seen a pullback in sterling. It took a softer retail sales report to turn the currency around as GBP/USD tried to make a run for 1.40. Over the past month, we seen significant gains and while we believe there will be further gains in 2018, the currency pair is due for a correction. Prime Minister May received the votes she needed to approve the key European Union (withdrawal) Bill and despite European Commission President Juncker’s hope that Brexit will be reversed, 2018 will be the year that a deal gets done. The Spanish and Dutch have already thrown their support behind a soft Brexit and UK officials will be operating under that assumption. In the meantime, as debates and negotiations continue, UK data has taken a turn for the worse with consumer price growth slowing year over year and retail sales taking a nosedive in the month of December. Excluding auto purchases, retail sales experienced its largest decline in 7 months. This does not bode well for next week’s fourth quarter GDP report as spending slowed in the last 3 months of the year. UK labor market data is also due for release and investors will be eager to see if wage growth also weakened. The prospect of softer wage data (after last month’s strong rise) leads us to believe that GBP/USD could slip down to 1.37.

Technically, the GBP/USD rally stopped short of the 38.2% Fibonacci retracement of the 2014 to 2016 decline. Right now there’s still a series of higher lows and higher highs but if GBP/USD breaks below 1.38, we could see a deeper correction that takes the pair to at least 1.37 and possibly even to the 20-day SMA near 1.36. However if 1.3950 is broken, the next stop will be 1.40 at which point, the big battle begins.