Short-Term Technicals Work with Long-Term Congestion for a GBPUSD Range

Trading Tip – Though conditions continue to improve from last week’s high volatility and technical distortions, congestion-based patterns are still few and far between. And, for those pairs that do offer range-based setups, technical boundaries are often so ill-defined that breakouts - or at the very least false breakouts - are a high-level risk. So, in contrast to Monday’s range strategy; today’s GBPUSD setup looks at a shortened trading time frame that doesn’t require a large swing or days of price action to play out. Best seen on time frames lower than a daily frequency, our suggested strategy is working against a short-term drive in momentum and with a buildup in technical resistance. The consistency of the 250-point drive since yesterday is the primary concern for this position; but the fundamental and technical stability of this move gives us reason to believe that a dense round of resistance can hold the market back. The source of this rally is no doubt the recent, sharp decline in the dollar; but for GBPUSD, the sterling makes for a poor counterpart to the greenback when it comes to yield income or potential appreciation. Forecasts for economic activity and interest rate policy in the UK is far less constructive than it is for the US; and this inequity has certainly played out in GBPUSD price action over the months. Should the recent upswing stall; our strategy works with a confluence of technical levels just below 1.6650. The stop further offers a comfortable buffer considering the average slippage on reversal tails on this time frame; and both targets are well within the average range of 24-36 worth of price action. For this reason, I will cancel all open orders by tomorrow.

Event Risk for the UK and the US

UK – There is plenty of event risk on the UK economic docket; but does this round have the necessary clout to encourage high level volatility - much less a breakout? Considering the dominant fundamental concerns for the pound surround the interest rate outlook, policy that is ballooning deficits and the lagging economic recovery (in that order); the data that we have on the calendar for the rest of the week poses a low threat to stability at best. The BoE rate decision next Wednesday is the next, major market-mover; but before that distant release we have service sector and construction PMI figures, house price indicators and industrial production. These readings have little precedence for volatility - especially in recent months. On the other hand, risk appetite could have a meaningful impact on direction. Considering the UK is struggling to stabilize its economy and markets, a stable rise in sentiment would be fortuitous. 

US – For the dollar, no specific indicator or individual fundamental concern has a greater influence on price action than underlying risk appetite. The greenback has maintained its standing as one of the primary funding currencies for a carry trade that grows increasingly popular as sentiment improves. For this reason, scheduled event risk will not likely define this benchmark currency’s immediate future. Instead, unpredictable shifts in underlying currents will make for a tenuous fundamental backdrop. That does not mean however that scheduled event risk can’t around volatility. This Friday’s NFPs has a history of catalyzing a sharp adjustment for the dollar.