GBP/USD Technical Analysis: One-Fifty is at it Again

2015-12-07 19:57:00 James Stanley

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Talking Points:

GBP/USD Technical Strategy: Flat, Long setup in last article had first target met – remainder stopped out
The Cable is continuing to conform to a longer-term down-trending channel, but a confluence of support at current levels may open the door for the possibility of reversal plays.
Wednesday and Thursday of last week saw two days of support at 1.4910, and this could provide the basis for reversal plays moving forward.

In our last article, we discussed the relevance of a major psychological level in GBP/USD at the nice, rounded even price of 1.5000. Psychological levels can ‘work’ over the long-term because they’ll have a tendency to bring new buyers or sellers into a market; and they can further promulgate price movements given the fact that many traders will use these even, rounded levels to place stops and limits which can, in essence, function like new buyers or sellers entering a market as these new rounded values are traded through. The price of 1.4991 sounds significantly weaker than 1.5001, even though they’re separated by a mere 10 pips. This is because, as human beings, we can’t help but think in round numbers, and price differentials around these numbers can often alter our perception of what is ‘expensive’ versus what is ‘cheap,’ even if the true difference is only a meager 10 pips.

This premise worked phenomenally last week, if only for a short period of time as the European Central Bank shocked the world. In our last article we looked at long setups using the nearby 1.5000 level as support. We suggested lodging a stop well below this psychological level in the event that a quick test temporarily traded through 1.5000 before buyers could jump back in to propel prices higher. This, again, worked phenomenally, as price action the following day moved down to 1.4993 before jumping higher to our first profit target at 1.5084. Prices had run all the way up to 1.5125, falling short of our secondary profit target before putting in a full-on reversal on the back of ECB. GBP/USD did find another support level at 1.4910, which is the 61.8% Fibonacci retracement of the secondary move in GBP/USD (taking the Financial Collapse low to the 2014 high).

With a Bank of England rate decision/meeting looming on the calendar for this Thursday, the pair certainly has the potential to put in some large moves. Our own David Rodriguez discussed this in last week’s weekly forecast on the Sterling, entitled British Pound Shows Signs of Life – Next Week Could be Big.’

The current setup in GBP/USD uses this 1.5000 level as a basis of support. Traders can look to buy with stops lodged below 1.5000 (as we had suggested in that previous article, nest the stop – don’t just place it at an obvious psychological level). Targets on near-term long positions can be cast towards 1.5100 (minor psychological level), 1.5184 (23.6% Fib retracement of ‘quaternary’ move in the pair, taking the July 2014 high to the 2015 low), 1.5244 (50% Fib retracement of the most recent major move), 1.5308 (23.6% retracement of the ‘big picture’ move, taking the 2007 high to the Financial Collapse low), and finally 1.5345 (50% Fib retracement of the secondary move).

For those that want to take a longer-term stance, or manage their risk more conservatively, that 1.4910 Fibonacci support level can be called to work. This had capped the lows of last week and could allow the position a little more room to ‘work.’ The absolute low from last week was at 1.4894, so traders would likely want to extend that stop down to 1.4885, which would amount to approximately ~180 pips of risk with current prices. This could be justifiable with the 1.5244 target as a minimum, as this could allow for a greater than 1:1 risk-reward ratio; but the 1.5308 level would be significantly more attractive for this longer-term variant of the setup.

If you want to follow real-time positioning statements in GBP/USD, please check out our updated SSI page on DailyFX in which we offer Speculative Sentiment Index in a real-time format.