GBP/USD Technicals Diverging From Fundamental Risks

The GBP/USD has been under immense pressure as the U.K. exposure to the crisis in Ireland has sunk the Sterling. Meanwhile, the problems in Europe combined with an act of aggression from North Korea against their southern half sparked a broader flight to safety which favored the greenback. British fundamentals have remained firm which has been fueling sterling support as the outlook for yields improved. Therefore, we could see the Pound regain its footing if broader concerns wane allowing for a retracement. The pair remains is carving out a descending channel which place s potential support at 1.5725. A failed test of the lower channel bound could provide a bullish opportunity.

Levels to Watch:

-Range Top: 1.6050 (Range, Pivot)

-Range Bottom: 1.5725 (Range, Pivot, SMA)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Long: Place an entry at 1.5725
• Stop: Set the stop to 1.5625-100 pips in risk
• Target: The first target is 1.5963- 11/23 high

Trading Tip – A break below the five month rising trend line is increasing downside risks for the pair so we recommend taking a cautious position. Also, traders may want to wait for a test of the 100-Day SMA at 1.5685 to see if holds as support before taking a position as the technical level could have a gravitational pull on price action. We also see former congestion in the areas which reinforces it as a potential barrier increasing the odds that it is tested before a reversal takes root. Nevertheless, our stop is below the current barriers and would keep us in the trade regardless. However, given the sharpness of the recent decline we could see a premature retracement before a test of the barrier, so trader may need to be nimble and get in before our entry, but shorten risk and targets.

Event Risk for U.K. and U.S.

U.K. – The second reading of U.K. GDP could be a market moving release if we see a large revision. A stronger pace of growth will raise the outlook for interest rates and potentially provide support, while a downgrade could fuel prevailing bearish sentiment. The other potentially market moving release will be mortgage approvals for October as tight lending standards are a concern for policy makers. Lower levels of borrowing will enhance the case for QE and weigh further on the pound. Conversely, a pickup in new loans will keep the BoE in the sidelines as inflation remains above their 3.0% threshold.

U.S. – The Thanksgiving holiday in the U.S. leaves very little event risk past Wednesday’s slew of releases. Durable goods orders, Personal Income and Spending and New Home sales will all cross the wires on the day. Forecasts are for improvements in all three which could further propel dollar strength. However, we could also see strong fundamentals from the world’s largest economy ease the current flight to safety and provide an opportunity for a reversal as risk appetite rebounds.