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GBP/USD – Bearish cloud cover & ‘J curve’ theory

FX:GBPUSD   British Pound/U.S. Dollar
GBP/USD             pair’s weak closing yesterday adds credence to the ‘Dark Cloud Cover’ formation noted on the daily chart yesterday.

This means the odds of the pair dropping towards 1.3146 (daily 50-MA) have increased.

Eyes UK trade data

Whether the pair extends losses towards 100-DMA or snaps two-day losing streak also depends to some extent on the UK trade figures for July due today. UK trade numbers has not been a major market mover since 21013 or so, however, the data gains importance now given that markets would be interested to see if the sharp drop in the Pound post Brexit vote has helped UK exporters.

J Curve

J curve theory suggests that in the initial stages post devaluation, the country’s trade deficit worsens. Eventually foreign importers (buyers) start importing more – respond to the rise in purchasing power, thus leading to improvement in the trade deficit of the home country.

Hence, the question today is – have the trade deficit figures worsened in line with J Curve theory… If so will Pound sink or rise on hope the trade deficit would improve significantly going forward

If we go by the technical chart – bearish pattern of dark cloud cover – the odds of the pair extending the two –day losing streak are high. Bearish invalidation is seen only above 1.3445 levels.
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