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GBP/USD Technical Analysis: 1.5000 Sets the Mark, Again

GBP/USD Technical Analysis: 1.5000 Sets the Mark, Again

2015-11-27 17:00:00
James Stanley, Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Flat, long-reversal setup identified
  • The continued USD-rampage ahead of the December FOMC meeting has left the Cable dwindling near a long-term support level.
  • With the Cable catching near-term support at a familiar psychological level, top-side reversal plays could offer attractive risk-reward ratios playing previous technical levels.

The past two weeks have not been kind to the British Pound

Going into Super Thursday, the Sterling was one of the few currencies in the world that was catching bids on the back of rate hike expectations for some point next year. But after a dovish BoE lowered inflation forecasts for 2016, and as pressure from Asia and the continued slowdown in commodities raised even more questions on the trajectory of future inflationary pressure in the UK, we’ve seen GBP being offered heavily against most major currencies. This huge down-side break was initially sparked by the dovish BoE tone on Super Thursday, but it was the blowout NFP report that really created a negative price movement, as three down-side profit targets were cleared over this two-day batch of data.

But as we wrote in that piece, the price of 1.5000 has been significant in the recent history of GBP/USD; and with a mid-line of a down-ward sloping channel offering an additional impetus for support, top-side reversal setups became attractive as a 1-to-4 risk-reward ratio was available using that 1.5000 level for risk with targets at the previous psychological value at 1.5250. It took a week, but eventually that target was cleared as well.

Price action ran all the way up to 1.5308, which is also a significant level, as this is the 23.6% Fibonacci retracement of the ‘big picture’ move in GBP/USD, taking the 2007 high to the Financial Collapse low. Since then, we’ve seen the Cable move back into this down-ward sloping channel that’s encapsulated most price action over the past four months, and with 1.5000 nearby current price action, reversal plays may be attractive going into next week. Next week brings a significant amount of data, but UK econ data is relatively quiet with no high-impact announcements on the docket. But with significant news out of Europe and the United States, it’s unlikely that the Sterling will remain completely unfettered.

Right now – short setups could be daunting given the lack of nearby resistance. The most recent swing-high was that 1.5308 resistance hit, and that daily high ran all the way up to 1.5335, so traders would need to be looking at a ~290 pip stop to look at down-trend resumption. This is entirely too much risk for a setup that doesn’t have a confirmed directional trend.

On the other hand, this could be a primary method of playing a reversal on USD, and with the Dollar continuing to trade near 12+ year highs, next week’s onslaught of non-UK data may provide the impetus for USD to move lower.

Traders can look to play the top-side reversal in the Cable by lodging stops below that theoretical support level at 1.5000. Likely, you’d want to wedge that stop below the psychological level, just in case a quick break to 1.4999 may trigger a the order before the setups comes to fruition. Traders can look at a stop in the ballpark of ~1.4985 to take on approximately 50 pips of risk. This would open the door for targets at 1.5087 (1-to-1), which is the 61.8% retracement of the most recent major move, followed by 1.5184, which is the 23.6% retracement of the tertiary move (taking the 2014 high to the 2015 low), 1.5250 (confluent level – major psychological level + 50% of the most recent major move), and lastly that same 1.5308 level that we mentioned above.

Should 1.5000 give way with strength, short-side setups can certainly be investigated once more adequate top-side resistance levels are available.

Are you looking to improve the execution of your analysis with a more proactive trading approach? Traits of Successful Traders may be able to help.

GBP/USD Technical Analysis: 1.5000 Sets the Mark, Again

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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