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GBP/USD Short Term Range in Danger Ahead of UK 2Q GDP, FOMC

GBP/USD Short Term Range in Danger Ahead of UK 2Q GDP, FOMC

2016-07-27 07:20:00
Oded Shimoni, Junior Currency Analyst
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Talking Points:

- GBP/USD settled between 1.3150 and the 1.31 figure

- UK 2Q GDP and FOMC ahead could see the pair extremely volatile again

- GSI is a powerful big data indicator that can help you determine whether short-term trends will continue or reverse

The GBP/USD has settled in a relatively narrow trading range for the last couple of trading days, with the pair seeing most trading done between 1.3150 to the 1.31 handle.

Key event risk ahead in the likes of UK 2Q GDP and the FOMC rate decision might see the pair significantly more volatile as we approach a jam-packed economic calendar in the days ahead.

Taking this into consideration, we look to find short term trading opportunities using the Grid Sight Index (GSI) indicator.

GBP/USD Short Term Range in Danger Ahead of UK 2Q GDP, FOMC

Click Here for the DailyFX Calendar

UK Advance 2Q GDP figures are set to hit the wires 08:30 GMT to start what could be a volatile ride for the pair in the days ahead on a heavy economic docket. Expectations are for a 2.1% growth print in 2Q year-on-year, higher than the prior 2.0% figure.

The figures represent the state of the UK’s economy heading into the Brexit referendum, which could prove significant with a possibly deteriorating economic outlook after Brexit.

Indeed, we have seen MPC members such as Weale (who appeared to lean on a “wait and see approach” for the next BoE rate decision) saying that Friday's weak PMI figures are the best short-term indicator that the bank has at the moment, and could prove significant for the rate decision next week. This could imply that even the more cautious MPC members are leaning in the direction of a cut next week. Consequently, weaker than anticipated 2Q GDP figures could amplify the more pessimistic narrative for the economy.

US June Durable Goods Orders are on the docket as well, and may see a short burst of volatility, but appear unlikely to have significant follow through as participant might hold back before committing to directional US outlook before the FOMC Rate Decision.

The FOMC rate decision is expected to show that the central bank opted to keep policy at status quo, with the market pricing a mere 10% probability of a rate hike. This might indicate that focus could be put on the Fed’s monetary policy statement. Comments on global headwinds, and particularly the Brexit situation might be in focus. If the market interprets that the Fed are looking domestically, with US data firming lately, this may be interpreted as more hawkish. A perceived hawkish statement (on the backdrop of other central banks heading in the opposite direction) could see the US Dollar trade higher on firming rate hike bets.

GBP/USD 5-Min GSI Chart: July 27, 2016

GBP/USD Short Term Range in Danger Ahead of UK 2Q GDP, FOMC

The GBP/USD is approaching possible support at 1.31 (see chart below), with GSI calculating higher percentage of past movement to the downside. The GSI indicator above calculates the distribution of past event outcomes given certain momentum patterns, and can give you a look at the market in a way that's never been possible before, analyzing millions of historical prices in real time. By matching events in the past, GSI describes how often the price moved in a certain direction.

You can learn more about the GSI here.

GBP/USD Technical Levels:

GBP/USD Short Term Range in Danger Ahead of UK 2Q GDP, FOMC

Click here for the DailyFX Support & Resistance tool

We use volatility measures as a way to better fit our strategy to market conditions. The British Pound has seen volatility reduce lately from record highs on the Brexit vote. With that said, the currency remains likely to see further erratic movements as the Brexit situation develops, and volatility might increase with the event risk on the docket. In turn, this could imply that breakout and trend oriented plays may be appropriate ahead.

GBP/USD 30-Min Chart: July 27, 2016

GBP/USD Short Term Range in Danger Ahead of UK 2Q GDP, FOMC

(Click to Enlarge)

The GBP/USD is trading sideways heading into the scheduled event risk, with the pair seeing most trading done between 1.3150 to the 1.31 handle. A clear break below the area of support starting from 1.31 could put the focus on possible support levels on the round 00s and 50s which proved significant since the Brexit decline.

Levels of potential resistance on a move higher may be an area of resistance above 1.3150, but watch the 1.3120 level that seems influential for very short term momentum. Further levels of resistance could be the 1.32 handle and what seems to be a key are of resistance above 1.3250. Another key zone might be around the 1.3330 level.

When price reaches those levels, short term traders might use the GSI to view how prices reacted in the past given a certain momentum pattern, and see the distribution of historical outcomes in which the price reversed or continued in the same direction. We generally want to see GSI with the historical patterns significantly shifted in one direction, which could potentially be used with a pre-determined bias as well.

A common way to use GSI is to help you fade tops and bottoms, and trade breakouts. That’s why traders may want to use the GSI indicator when price reaches those specific pre-determined levels, and fit a strategy that can offer a proper way to define risk. We studied over 43 million real trades and found that traders who do that were three times more likely to turn a profit. Read more on the Traits of Successful Traders” research.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 61.9% of traders are long the GBP/USD at the time of writing. The SSI is mainly used as a contrarian indicator, implying weakness ahead.

You can find more info about the DailyFX SSI indicator here

--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com

To contact Oded Shimoni, e-mail oshimoni@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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