Alex Kazmarck of Trade Leader SpotEuro presents analysis of the GBP/USD.
The weekly GBP/USD chart shows a very long consolidation pattern in the form of a triangle following the big drop during the 2008 crisis. Once the bottom formed near 1.3500 a retracement began to take shape, finding a top just under the 1.6800 level, which can be noted as the 50% retracement level. This triangle continued to consolidate for the next three years until the first quarter of 2013 when it was broken to the downside; however, the move to the downside lost traction mainly due to the dollar and the risk-on environment. There was a double bottom in mid-2013 before the sterling began to rally back towards the upper end of its previous four year range.
Looking at the daily chart, focusing on the July impulsive movement that created a new low during 2013 but was unable to close below the figure, I think many are surprised at the resilience the pound has shown during the last few months. Most of the move can be attributed to a weaker dollar (USD Index) along with supporting evidence of stronger economic growth within the UK; however, I think it’s too early to call this a new trend until we see a clear break above the earlier mentioned 50% retracement.
Once the pair closes above 1.68, it should get a positive boost from a technical perspective and it will be “open water” all the way to 1.76, the 62% retracement on the weekly chart. If this occurs, the analysis would have lost much of short term bearish potential I’m looking for.
While I’m not calling for any specific direction at this time, I’d like to note that the false breakout to the downside has also created a possible head and shoulders formation with the orange box representing the left shoulder and the current rally representing the “head” of the formation. It’s also interesting to point out the rising trend-line from the triangle acting as resistance. Having said that, there is also an inverted head and shoulders formation with the double bottom representing the head and the 1.5850 level representing the neck-line as can be seen on the daily chart.
Technically, this setup can play out in several different ways and I am placing more emphasis on the USD than on the GBP. While technically this pair has rallied quite nicely following the false break and double bottom, I am reluctant to take a long at these levels and would prefer to short the pair into a possible risk-off scenario going into the December FOMC announcement. I’m keeping an eye on the daily trend-line and a close below 1.5800 should support the bears. Once the pair closes below the 1.4900 level, the pair should continue to gain momentum and a possible retest of 1.43 and 1.36 will be targeted. Perhaps we’ll continue to see more range-bound activity with increased volatility.
Short term support – 1.6300 to 1.5850
Short term resistance – 1.6500 to 1.6800