The U.K. housing market has continued to deteriorate as prices fell 0.6% in March, the fifth straight monthly decline. Therefore, expectations are that homeowners were reluctant to pull equity from their homes as its value continued to fall. Experts are predicting that for the fourth quarter consumers had over a billion dollars less to spend on big ticket items like vacations and automobiles, as they reduced the amount of equity they withdrew to 9.3 billion from 10.5 billion the quarter prior. Additionally, expectations that the BoE would continue to lower rates going forward gave borrowers and incentive to hold off and wait for more favorable terms. Recently, the Pound has been coming under selling pressure as speculation increases that the central bank will continue to cut rates by another 50 points at their next meeting. Similar to its cousin from across the pond, a housing slump and tight credit markets have wreaked havoc on the British economy forcing the hand of the MPC. Policy makers would rather focus on inflation that rose another 0.7% in February bringing the year-over-year total to 2.5%, and threatening the 3% threshold that requires a letter from Governor King to government officials explaining the breach. Recent data has given a glimmer of hope as retail sales and manufacturing beat expectations, which may reduce expectations for another rate cut. Increased borrowing from homeowners may give the BoE further evidence that they may not have to cut rates as deep as expected which may fuel bullish cable sentiment. Also, the day features testimony by Fed Chairman Bernanke, which can potentially trigger bullish or bearish dollar sentiment.

The markets may be quiet in front of Bernanke testimony, especially given the recent volatility. The trailing quality to the equity withdrawal data may make it inconsequential, given the magnitude of the events since the end of the fourth quarter. Nevertheless, a significant increase in borrowing may provide enough bullish sentiment on the back of the recent manufacturing surprise to warrant a long trade. With a confirmed, positive fundamental mix we will look for a five-minute green candle to confirm entry on two lots of GBPUSD. Our initial stop will be set at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind resistance levels built overhead) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.

On the other hand, if the deteriorating housing market proves to have weighed on consumer spending, the chances of a 50 point cut at the next BoE meeting will significantly increase. Then, we will follow the same strategy for a short as the long above, just in reverse.

David Rodriguez is a Currency Analyst at FXCM.