Sterling tumbled dramatically in December and January, losing significant value to both USD and EUR.
Two factors received most of the blame for the selloff.
First was a readjustment in expectations regarding UK interest rate liftoff. The Bank of England had been expected to raise rates in early 2016, with the US Fed rate hike in December giving the BoE cover to do the same. A few weeks ago, however, Governor Carney indicated the UK economy still isn’t ready to withstand an interest rate increase despite positive economic reports in recent months.
Second, was supposed concern about what a Brexit referendum could have on the UK economy, credit rating, etc. This seems less likely to be a real reason and more of an excuse to justify a takedown. The impact of a vote would likely be more right around the vote and besides, a UK departure from the EU would impact Europe too and EUR has been rock solid the last few weeks.
What does seem more reasonable to me is that Governor Carney likely wants to keep the central bank to stay out of the Brexit debate and so he wants to delay rate liftoff until after the vote. Rather than coming out and saying so, he appears to have taken the stance of blaming delay on the economy instead.
To me, the main factor driving GBP down has been the change of expectations on UK rate liftoff out to 2017. I think this may be overdone though as there’s no reason the Bank of England couldn't raise rates in the second half of 2016 if the economy continues to perform well and the FOMC continues its normalization program.
This week’s fundamental developments could lead to a tug of war between traders speculating on when UK rate liftoff could arrive.
GBPUSD started to come under distribution in late August and for about three months, declines were steady and orderly. Between mid-December and mid-January, selling pressure intensified dramatically driving Cable down from near $1.5200 toward $1.4000 a huge decline.
By a couple of weeks ago, however, GBPUSD had become extremely oversold as shown by the RSI indictor. An inside day, a hammer candle and a successful test of the $1.4000 round number indicated selling pressure had finally been exhausted. Since then, Cable has come under renewed accumulation, climbing toward $1.4300 and testing $1.4350 a 23% retracement of the recent downleg, while support has moved up toward $1.4230. .
RSI rising toward 50 indicates downward pressure continues to ease. In a breakout from the current range. GBPUSD could test $1.4515 where a 38% retracement of the recent downtrend and a 23% retracement of a the longer downtrend from June cluster together.