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Forex: Sterling due for consolidation after recent declines?

FXstreet.com (Barcelona) - The Sterling was able finish the day with small gains, closing up 8 pips at 1.5224. At one point the pair had traded as low as 1.5173, but was able to find support and drift higher much of the US session. It was a busy economic session out of the UK, with the Claim Count figure coming in better then expected at -7.3k vs. -3.0k forecast. Furthermore, the Bank of England released its latest quarterly inflation report which could have influence on the pair in coming days.

According to analysts at RBS,”In short, the MPC's growth and inflation outlook is marginally better (less dire) than was the case in the previous Inflation Report in February, but the Bank still expects the recovery to 'remain weak by historical standards' and for a protracted overshoot in inflation (until early 2015).”

They went on to add, “The marginal upward revisions to the GDP forecasts were reinforced by the Governor's uncharacteristically upbeat rhetoric that 'a recovery is in sight' (albeit a 'weak and uneven' one). The short-term, high-frequency indicators have shown some improvement in recent weeks. But this cannot detract from the medium-term headwinds facing the UK (excessive public and private debt levels, muted household income growth, hesitant business investment and the UK's main export market slipping back into mild recession)”.

On a final note they commented, “Our key take-away from this Report is that an extension of QE gilt purchases this year has diminished further. Our central forecast for some time has been for no near-term QE extension. This forecast was subject to a significant challenge in February 2013 when the Governor and Paul Fisher joined David Miles in voting to extend QE”

From a technical perspective, the pair might be due for some short term consolidation after the steep declines suffered the previous four trading days. However, the pair is still under influence from the ‘bear flag’ continuation pattern which was confirmed with the daily close below 1.5360 on May 13th. It should be noted the RSI (14) is sitting just above 40 on the daily chart, which if broken will be confirmed a ‘bearish momentum shift’ into the 60-20 range. Should this occur, it could help bring in momentum selling which could spur further declines. Initial resistance sits at 1.5250 (bearish reversal candle on 1 hour chart), followed by 1.5280 (previous support, now resistance on 1 hour chart). First support sits at 1.5173 (previous day low), followed by 1.5130.

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