GBP/USD Technical Analysis: Choppy Cable Seeks Resistance

2016-07-20 17:43:00

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Talking Points:

GBP/USD Technical Strategy: Bigger-picture trend still bearish, shorter-term chop building near support.
GBP/USD is stabilizing above the 1.3000 psychological level, but rips-higher will likely face pressure given the expectation for future rate cuts out of the Bank of England.
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In our last article, we looked at the British Pound shortly after the most recent Bank of England rate decision. And as we mentioned, even though the bank held rates flat at that meeting, the world would likely be looking for another rate cut in the month ahead as the BOE wades through another Super Thursday batch of announcements. Traditionally, adjustments to rates from the BOE have been coupled with fresh inflation projections to provide proper context of the move; so after Mark Carney began talking up the prospect of rate cuts just days after the Brexit referendum, August became a likely expectation to see that next rate cut.

However, that being said many were still looking for a cut, with as high a probability as 86% ahead of that BOE meeting. So when the bank didn’t cut, we saw quite a few rate-cut bets jump out of the market, leading to bullish near-term price action. As we advised in our last article, traders can let GBP/USD rip-higher to a more comfortable level of resistance before looking to trigger-in to the short trade in anticpation of next month’s rate cut.

Since then, the Cable has meandered in a choppy downward-sloping channel, but has remained well-above prior lows set earlier in the month of July. And while price action on the 4-hour chart may be offering down-side continuation entries, scaling back to the daily highlights the juxtaposition facing trend chasers currently in the Cable. The most recent swing-high on the daily chart is the same identified in our last article, right around the 1.3500 psychological ‘big figure’ that also happened to be the financial collapse low in the pair. This has been a massively important level in the pair for well over 6 years now, and traders looking to chase the pair lower from here would likely want to investigate stop placement above this level; which with current prices would amount to a stop of more than 325 pips. And for a situation that only has 385 pips until we reach that multi-year low, the risk-reward of the setup could be seen as utterly unappealing right now.

Chart prepared by James Stanley

Moving forward the stance will remain the same, looking for a better level of resistance that could offer a more appealing entry on the down-side move. We’ve kept the same price action zones as last week, and have added another more aggressive area of potential resistance from 1.3335-1.3350. This would be a level for short-term approaches with targets set towards the most recent swing-low at the 1.3064-vicinity. Should price action rip higher to find resistance in this zone, attractive risk levels could be instituted for shorter-term approaches.