The British pound is still holding up quite well against the US Dollar but zooming out to a long-term daily or weekly chart shows that the price is consolidating more than it is trending despite the weakly bullish feel.
The weaker US Dollar is significant, because last week the USA released weaker-than-expected US inflationary indicators such as CPI and PPI, and this dovish influence on monetary policy has bled into lowering near-term Fed hike expectations. However, the greenback might catch more of a bid if Middle East tensions continue to strengthen, both because the US Dollar tends to attract safe-haven demand in periods of geopolitical tension, and because firmer oil prices could keep inflation pressures alive within the global economy which would likely make the Fed less willing to turn dovish.
Why This GBP/USD Range Matters Right Now
The GBP/USD currency pair has been trading within a medium-term consolidation pattern for several months, with resistance clustered near 1.3550 (or maybe even $1.3650 as the true highest top) and support at around 1.3150 area. Within this area there are several important levels, but the price is nearing the upper end of the zone.
We saw earlier today that a new higher support level has been established at $1.3459 and there is buying from this area on an intraday basis. Having said that, the top overhead at $1.3550 has continued to trigger selling, and we will probably need to see stronger bullish momentum before that could be broken.
With a rangebound market facing balanced bullish and bearish pressures, and the price near the top of the range, we are primed for a pivotal moment, or at least for price action which will tend to respect support and resistance. Either can give opportunities.
What Price Action is Showing
The key technical picture is very simple: a medium term range, with a top at either $1.3550 or $1.3650. Over the short term we see slightly bullish price action with the price forming new support at $1.3459 so if the price holds up above that level it makes sense to be cautiously bullish. Before that, we had a higher low at $1.3427, which adds to the short-term bullish picture.
The fact that the price has risen over the first hour of today’s London session is another bullish factor, which gets a data-driven tailwind from generally lower US inflation indicators. However, the US Dollar is going to have to sell off more strongly than it has been to generate a meaningful breakout and the end of this range.
It looks as if the line of least resistance is upwards, but we must ask ourselves whether the major round number at $1.3500 is going to act as resistance before the more obvious level at $1.3550. There is a secondary resistance level at $1.3519, and the last two times $1.3500 was reached the price did not react.
I conclude that the line of least resistance is upwards to $1.3519.
Where This GBP/USD Range View Could Break Down
I could be overly certain about the existence of this range. It is a range but is not especially well-defined. It might be that the highs and lows of the past few months might not be well respected by the price action, because the price action of the past few months has the feel of a more “accidental” correction. This would tend to support a more bullish view, because going by the recent price action, today’s movement, and two strong bullish impulsive waves higher which we have seen over recent days, the price looks as if it is headed higher.
Additionally, if the price does not respect $1.3500, the horizontal levels above that might not have much effect if reached, which would suggest that looking for a short trade entry in that price area could be a painful project.
Alternative Scenario: GBP/USD Extends Higher Instead of Respecting the Range
The alternative scenario to my range view is one where the price just continues to advance, possibly with surprising strength and speed, or maybe gradually with unpredictable stops and starts and support and resistance levels which are not obvious before they form. If this is the scenario which plays out, then shorting above $1.3500 could be very difficult.
One macro development which might make this scenario more likely would be if President Trump suddenly started trying to “make nice” with the Iranian regime. This could remove the inflationary and general risk fears from the equation, or at least seriously dampen them, which could remove the barriers to the US Dollar taking a further meaningful fall. With a generally strong British Pound, this would be likely to send the price higher here.
What Traders Will Probably Watch Next
The first thing traders will be looking at is whether the support at $1.3459 continues to hold. As long as it does, bulls will be optimistic. If the price breaks below that level, that brings $1.3427 into play, which could also act as an effective floor.
If the price rises to $1.3550 and makes a strong and obvious failure to break higher, that would be in line with the range/bearish opportunity playbook, and a short trade triggered by that could look attractive, as the action would confirm both the range and that $1.3550 is the effective top of it.
Comments
Log in or sign up to join the conversation.