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GBP/USD Technical Analysis: Cable Boxed-In Ahead of BoE

GBP/USD Technical Analysis: Cable Boxed-In Ahead of BoE

2016-02-01 16:52:00
James Stanley, Currency Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Flat, short setup identified.
  • The Cable continues to trade in the box developed last week after 6-year lows were printed.
  • A Bank of England meeting on Thursday will likely deliver the impetus for the next trend, but traders can watch the current box-formation for early breaks ahead of BoE.

The Cable stole headlines to start the year after multi-year lows were broken as the British Pound saw weakness across-the-board. In our last article, we asked if the Cable had yet hit terminal velocity on the down-trend, and judging by price action, the answer was a definitive no. At the core of this movement were rate expectations for the UK, and as global pressure continue to heat up those rate expectations for the UK continued to dwindle. We hear from the bank and Mr. Mark Carney this coming Thursday, and this could certainly inspire trends in either direction. Should lower inflation forecasts be on the horizon, we’ll likely see even lower-lows, and given the continued SSI reading of +1.63, that could make for amenable short positions.

Near-term price action is neutral as we’ve basically been building in a box for the better part of a week. On shorter time frames, such as the hourly or 4-hour this will appear with ‘range-like’ tendencies and this could be opportunistic as we approach the latter portion of the week. The box of the past week’s price action in GBP/USD is below:

The box itself is a neutral formation; all it really tells us is that buyers and sellers are roughly meeting in the middle. But this could be a fantastic setup for the next move (which, when trading, is what matters most).

For those that want to buy, they can simply wait for either a) support in the range to be hit before buying or b) wait for a break of resistance to prove that the up-trend may come in, and then get long after a ‘higher-low.’ And for those that want to sell, they can either a) sell while at resistance or b) wait for a break of support to prove that the down-trend may have staying power, and then look to get short on a ‘lower-high.’

Right now, we have price action at resistance and this could open up the door for short-side, trend-continuation entries. If we take a look at the longer-term chart, we’ll notice that this recent box is catching resistance off of a significant long-term level at 1.4371. This is the 76.4% Fibonacci retracement of the secondary move in GBP/USD, taking the Financial Collapse low up to the 2014 high. This level had provided support while price action was on its way lower, and has now given three consecutive days of resistance.

GBP/USD Technical Analysis: Cable Boxed-In Ahead of BoE

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

Traders could sell off of this level of resistance with stops above 1.4450 (aggressive) or 1.4510 (more conservative), with targets set towards 1.4150 (prior price action swing low), 1.4075 (prior low), and then 1.4000 (major psychological level).

Should 1.4000 be traded through, we’re in a veritable no-man’s land as price action has been very fleeting in this vicinity since 2002; but that could open the door for potential targets as deep as 1.3500, which was the low in 2009.

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

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