The GBP/USD pair has had quite a steady move higher since the summer of 2013, after bottoming out at 1.4840 for the second time in 4 months. Since then, the pair has managed a 12.1% increase in price in the span of 6 months. Consolidation occurred between late September and November before continuing higher to recent two and a half year highs. Over the past few weeks the pair has managed to find resistance just under the 5 year high of 1.70, topping out at 1.66 beginning in early January. The current price action points to a correction, with momentum in favor of the dollar.
In this analysis I will only cover technical points to consider for both short and long positions along with fundamental catalysts that could alter the current trend higher.
The first point I’d like to bring to your attention is the big move that occurred during the fall of 2008, when the pound dropped from 2.01 to 1.40 during the highs of the financial crisis. The price action we’ve seen since quantitative easing began later that year was a corrective one, with a 50% retracement at 1.6830 acting as resistance for the last 4 years. During this time, it looked to have traded in a wedge (marked in orange) before what seemed to be like a breakout lower that eventually double bottomed at the 1.4850 level. What made this move believable was that the initial break of the lower wedge support retraced to the 62% level before another sharp move lower broke the previous pivot low; however, it was not able to close below the pivot low and from that moment the pound began its 12% rise.
Looking closer at the pounds recent strength, we can see the rise taking place in a channel, which is currently being tested at the support. Previous level of resistance, which acted as support in December, is just under 1.6300, which I think will be important if the channel is broken. If we see a daily close below 1.6200, then I suspect a retracement is in full gear and my target for a short would be somewhere between 1.57 and 1.58, which is just above the 50% fib level of the channel. This retracement should continue to be valid until the January high of 1.66 is broken.
The longer term analysis seems to point for further sterling strength, unless there is a fundamental shift in UK housing, inflation, or economic data that acts as a catalyst for a reversal. Pound strength is also technically supported by the strong reversal following the break of the wedge, and the recent strength that resulted in the 12% appreciation of the pound thereafter. Once 1.66 is broken I expect 1.70 and 1.76 to come into the picture with the earlier being resistance during 2009 and the latter being 62% retracement of the financial crisis.
While the longer term trend says long, the shorter term analysis is pointing to a correction in favor of the dollar. I’m looking for this week’s economic data to be the driver of price action with technical support/resistance levels acting as inflection points. The 1.66 resistance must be broken, and I prefer to see a close above the figure, before I consider a long and continuation of the uptrend.
A close below 1.6300 would result in the current uptrend being broken and I will look for 1.6200 as support before a close below will confirm a correction with a target of no less than 1.6000 with continuation to the 1.58 level. This could also be the beginning of a head and shoulders formation.
The correction could begin when UK and US inflation figures are released this week (Tuesday/Wed & Thurs) or on economic weakness such as US and UK Retail Sales (Tuesday/Friday). Mark Carney is also scheduled to speak on Wednesday. A lot of potential catalysts; I expect volatility and some of the prior mentioned levels being seen as early as Tuesday.
Short term resistance – 1.6500-1.6600
Short term support – 1.6200-1.6300