The market environment remains one with a strong US Dollar that is overcoming most other currencies – including this one, even though we are seeing the resumption of strong risk-on environment which has sent major stock markets (at least in the tech sector) and cryptocurrencies soaring this week. There is little economic data scheduled this week which might affect the GBP/USD currency pair, so it could well be a week dominated by technical factors and speculators who are probably going to be exceited by a sustained bullish breakout by the US Dollar Index (DXY) well above the 100 area, which has acted as historic resistance.
The GBP/USD currency pair is certainly going to be one of the pairs in the focus of Forex analysts today and for the rest of this week, increasingly so as the US Dollar continues as the major mover and gainer this week, although the British Pound is not a relatively weak currency.
GBP/USD Fundamental Analysis
The US Dollar’s fundamental outlook remains bullish in the short term. The Fed’s recent rate hike and its indication that further tightening may be necessary have lifted the Dollar Index to above 100.4, its highest level since July, as markets price roughly a 53% probability of another 0.25% hike in October and an approximately 89% chance of at least one further increase by December. Even more tellingly, market imply a 40% probability of two 0.25% rate hikes by the end of the December meeting. High US yields and persistent inflation risks support the greenback, although much of the monetary-policy advantage is now priced in, so weaker US data or a more dovish Fed tone could limit further upside. It worth noting the market is a little less sure of the hikes today than it was yesterday.
Sterling’s outlook is comparatively weaker, especially against the Dollar, as the Bank of England held Bank Rate at 3.75% despite inflation rising to 3.1%, while the Fed is signaling more tightening. The widening perceived Fed–BoE policy divergence is acting as the principal headwind. UK inflation and still-elevated energy costs may eventually push the BoE to hike, but its next meeting is not until November, leaving the Pound vulnerable while US rates and the US Dollar remain supported.
GBP/USD Technical Analysis
When we zoom out to a daily or longer-term chart, the price action looks consolidative: the price has been making a range between approximately 1.3650 and 1.3100 for more than the past year. Drilling down, however, shows that the price action has been solidly bearish for almost the past two weeks, with an obviously impulsive and strong downwards trend over this period, evidenced by the slightly sloppy linear regression analysis study shown within the price chart below. The channel did not hold all the price action so I do not classify it as particularly reliable.
Right now, the price action has printed two new resistance levels nearby, which is a bearish sign, as is the continuing sequence of lower highs and lower lows. As I write, the price is testing the support level at 1.3310 – it does look like this will be broken down, but bears will face another test at the round number of 1.3300. If we get a sustained break below that, it opens the way to a further move down toward the next support level at 1.3264 without any obstacles.
GBP/USD H1 Price Chart – Bears Testing 1.3310
My Take on the GBP/USD
The picture looks solidly bearish, and a further strong run by the US Dollar looks like it could be a real possibility over the near term now we seem to have a firm breakout beyond the 100 area in the DXY. The British Pound might not be the best currency to trade short against the Greenback, but it is exposed fundamentally, so it might be as good as any.
Today the price might struggle to get below 1.3300, but if it does, there should be about 30 to 40 short pips at least on the table.
I think the best strategy today will be to try to day trade short below (but not far from) 1.3300 targeting the next support at 1.3264.
Review, Support & Resistance Levels
My previous GBP/USD free signal on 22nd September gave a profitable long scalp from the early test of the nearest support level at 1.3329 just as I suggested.
New trades should only be entered prior to 5pm London time today.
Long Trade Ideas
Go long following a bullish price action reversal on the H1 timeframe immediately upon the next touch of $1.3264,
Put the stop loss 1 pip below the local swing low.
Adjust the stop loss to break even once the trade is 25 pips in profit.
Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
Short Trade Idea
Go short following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.3406 or $1.3202.
Put the stop loss 1 pip above the local swing high.
Adjust the stop loss to break even once the trade is 25 pips in profit.
Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
The best method to identify a classic “price action reversal” is for an hourly candle to close, such as a pin bar, a doji, an outside or even just an engulfing candle with a higher close. You can exploit these levels or zones by watching the price action that occurs at the given levels.
There is nothing further scheduled today concerning either the British Pound or the US Dollar.
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