Trade Setup of the Day: Short GBP/USD (February 21, 2013)

The pound has been selling off aggressively lately as the United Kingdom has been printing weak data and the BOE emphasized its commitment to weak monetary policy at the expense of stronger inflationary pressures. This puts the British economy at risk of stagflation, which could be more damaging to growth later on.

On the other side of the fence, the U.S. dollar has been enjoying a strong rally for the past few trading sessions after the FOMC meeting minutes revealed that the Fed was actually considering overlooking its employment and inflation targets. Recall that Fed Chairman Bernanke said previously said that the economy has stalled and that the expansion will just be moderate. However, in their latest monetary policy meeting minutes, policymakers showed more confidence in the economy and even suggested withdrawing asset purchases soon.

The pair’s breakdown below 1.5350 represents a pretty significant signal that pound bulls are no longer willing to defend the support zone. Unless Fed officials retract their recent hawkish remarks, the U.S. dollar could continue to be boosted by upbeat monetary policy expectations.

Meanwhile, weaker than expected figures from the U.K. could push GBP/USD all the way down to the 1.5000 major psychological support. If that level still breaks, GBP/USD could keep selling off until the next lows around 1.4300.

By Kate Curtis