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GBP/USD Technical Analysis: Higher-Lows in Post-Brexit Range

GBP/USD Technical Analysis: Higher-Lows in Post-Brexit Range

2016-09-28 17:03:00
James Stanley, Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Longer-term price action remains bearish; post-Brexit price action range-bound.
  • The post-Brexit Fibonacci retracement continues to show support/resistance inflections.
  • SSI - If you’re looking for trading ideas, check out our Trading Guides.

In our last article, we looked at the British Pound as it attempted to build-in a bullish price action structure after dwindling near the post-Brexit lows for the better part of two months. And the logic behind the top-side move still exists, riding on the expectation that the ‘sharp repricing’ in the value of the British Pound from the Brexit referendum may lead-in to inflationary pressure in the United Kingdom. Should this inflationary pressure show up in imports for the import-heavy economy, the Bank of England’s hand may be forced away from future interest rate cuts for the fear of stoking even more inflation from an even weaker British Pound.

We haven’t seen the Bank of England capitulate on rate cuts just yet. At the BoE meeting in September, Mr. Carney, once again, took a dovish stance with markets warning that the Bank of England may be looking at more cuts down-the-road. But this isn’t what’s most interesting around this scenario; but rather the corresponding move in the Cable after those comments made their way into markets. These comments sent the Cable flying lower, again, similar to what happened after Mr. Carney spoke in June just days after the Brexit referendum, in August at the Bank of England’s rate decision, and again in September when the BoE launched the ‘bazooka’ of stimulus in response to Brexit. Each of these times that Mr. Carney has taken center stage the British Pound had weakened in value. The interesting part of this is that the weakness in the Cable appears to be waning with each attempt; producing a series of higher-lows on the daily chart.

Connecting the low in July to the low in August produces a trend-line that runs into current support levels (shown in Green below). Also of interest is the Fibonacci retracement of the post-Brexit move, taking the high on June 29th to the low on July 6th. For the past week we’ve seen numerous support inflections off of the 23.6% retracement of that move at 1.2965, and this is yet another indication of support building near these long-term lows in the British Pound.

So, traders would likely want to avoid getting caught in a long position when Mr. Carney speaks because, if recent history is any guide, he will talk the currency lower. But in his absence the Sterling has been free to creep-up; and longer-term this may be a more attractive trade idea as a) rates can’t go significantly lower for the BoE given that Mr. Carney has seemingly ruled out the possibility of negative rates and b) oncoming import inflation appears to be simply mathematical at this point, and this could continue to steer the rate conversation at the Bank of England.

GBP/USD Technical Analysis: Higher-Lows in Post-Brexit Range

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

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