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Talking Points:
- GBP/USD Technical Strategy: Long position triggered
- Continued bullish price action opens the door for up-trend continuation
- Confluent support at the 1.5500 zone could offer an attractive area for risk management/ stop placement.
In our previous piece on Friday, we noted the budding new up-trend in the Cable, driven by rate expectations on the heels of the strongest wage growth in the UK in over six years along with commentary from multiple Bank of England members noting how higher rates may be here ‘sooner rather than later.’ Since then, considerable USD strength has found its way back into the currency market, but GBP/USD is continuing to hold support in the 1.5500 zone mentioned last week: This can open the door for long positions with an attractive risk-reward ratio.
The bullish price action in GBP/USD began on September 7th, and has since continued to put in ‘higher highs,’ and ‘higher lows.’ Ahead of FOMC, resistance had developed just under the 1.5500 handle, with 4 consecutive top-side daily wicks showing from 1.5425-1.5475. As the Fed backed off of the September rate hike, the Sterling throttled higher as this is one of the few currencies with which we can actually look for higher rates in the not-too-distant future. This is one of the reasons why I had considered Long Sterling as the Most Attractive Way to Trade FOMC.
After ratcheting even higher in a continuation move that topped out on Friday morning, GBP/USD ran into the underside of a projected trend-line, catching near-term resistance off of old, projected support (shown in the below chart with the purple line). This created a retracement that lasted into this morning, and support is now showing in the zone of 1.5500. This area is near the 50% Fibonacci retracement of the most recent major move (taking the May low to the June high), as well as being a ‘major psychological level,’ and a price that has offered multiple iterations of support and resistance in GBP/USD in the recent past.
Long positions can offer an attractive risk-reward ratio with the current technical setup. Stops can be placed at 1.5407 (just below the 61.8% retracement of the most recent major move – shown on the below chart in gray-dashed lines), to take on approximately 100 pips of risk. Targets can be scaled out at 1.5650 (last week’s high), 1.5730 (38.2% retracement of the most recent major move), and then 1.5800 (psychological level and the 2.5 month high).
Written by James Stanley of DailyFX; you can join his distribution list with this link, and you can converse with him over Twitter @JStanleyFX.
