Pound bulls get day in sun

October 7, 2015 09:45 AM

The big news in global markets today is Anheuser-Busch InBev’s higher buyout offer to SABMiller. After the British-domiciled SABMiller turned down offers of £38 and £40 per share earlier, AB InBev raised its latest proposal to £42.15/share for a total value of $104B. If accepted and approved by anti-trust regulators (a big risk to any potential merger), the deal would create an international behemoth responsible for about one-third of global beer supply. 

Not surprisingly, the news has had a big impact on the individual stocks, but for forex traders, it also could create major cross-border capital flows in favor of the British pound. Forward-looking traders have already started to front-run this potential move, though another rejection or regulatory holdup could still short-circuit the bounce.

Beyond the potential M&A flows, the pound is also catching a bid on a more traditional catalyst: stronger economic data. This morning’s UK Manufacturing Production report for August came in at 0.5% m/m, better than the 0.4% reading expected. This was actually the fastest pace of growth in industrial activity since February 2014 and comes on the back of two consecutive monthly declines in the indicator.

Technical View: GBP/USD

After a bit of a false start on Monday, GBP/USD has been in rally mode over the last two days. As we’ve noted before, the pair appears to have carved out a big head-and-shoulders pattern, or at least a rounded top over the last five months, but that longer-term bearish pattern does not preclude near-term rallies. Especially after selling off nine consecutive days into last week’s low, a counter-trend bounce is hardly surprising.

It’s also worth noting that the RSI indicator put in a higher low while the exchange rate put in a lower low, creating a clear bullish divergence. This setup signals waning selling pressure at the lows and could mark a multi-week low around the 1.5100 handle. That said, the much longer-term (and therefore more reliable) bearish technical setup augurs for fading any rallies toward the 1.5400-1.5500 zone, where the 100-day moving average may provide resistance.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.