GBPUSD Major Correction (Jan 12, 2015)

Using the Fibonacci retracement tool on the latest swing high and low on the 4-hour time frame indicates that the 61.8% Fibonacci level lines up with a former support zone.

The broken support lines up with the 1.5500 major psychological level, which might act as strong resistance in the event of a major pullback. However, a shallow retracement might be possible, as stochastic is already indicating overbought conditions.

With that, the 38.2% Fib or the 1.5300 major psychological level might already hold as resistance before selling pressure picks up. In that case, price could test its former lows near the 1.5000 mark or perhaps make new ones.

GBPUSD has been on a steady downtrend in the past months, as the weaker odds of BOE tightening forced the UK currency to head lower. In addition, the increased prospect of Fed rate hikes for this year provided support for the US dollar, along with risk aversion spurred by geopolitical tension.

Last week, the US printed another strong NFP report, hinting that the jobs market has picked up steam and may be in for more developments. This could push the Fed closer to tightening later this year, although some labor components reflected weaknesses. In particular, the participation rate marked a decline while wage growth was absent, forcing the dollar to retreat slightly.

However, the path of least resistance for GBPUSD is still to the downside, as the US remains fundamentally stronger compared to the UK. With that, the selloff could resume sooner or later, depending on the market catalysts.

For today though, there are no main event risks from both the US and the UK as there are no top-tier releases lined up. With that, the ongoing trends could carry on unless there is a major change in risk sentiment.

By Kate Curtis from Trader's Way