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GBP/USD Technical Analysis: The False Breakout as a Signal

GBP/USD Technical Analysis: The False Breakout as a Signal

2016-10-26 16:46:00
James Stanley, Currency Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Longer-term price action still bearish; short-term bullish reversal.
  • GBP/USD is continuing to trade near historically-low levels; most technical observations will be relegated to near-term analysis.
  • If you’re looking for trading ideas, check out our Trading Guides; they’re free and updated for Q4.

In our last article, we looked at the current conundrum in GBP/USD. While recent price action has been discernably bearish, the fact that prices are sitting so near 30-year lows can make the potential of bearish trend continuation seem like a distant prospect. And if we combine this technical backdrop with the fact that the recent ‘sharp repricing’ in the British Pound is likely going to lead to higher-than-desired inflationary pressure down-the-road, which could potentially force the Bank of England’s hand away from looser policy options, and we could have the recipe for a reversal.

However, as we’ve been warning – this is a headline-driven market and there is constant potential for yet another news-based driver to roil price action. With so much fear around Brexit, we can certainly see panic-driven moves take the currency lower, even if there is a valid and legitimate case to be made for stronger prices. So traders will still want to exercise extreme caution if trading anything associated with GBP or the U.K.

In the effort of cautious prudence, traders can pre-assign levels of interest in order to denominate approach. Last week, we looked at the level of 1.2325 as being a key level in GBP/USD, as this had provided the ‘post-Flash Crash swing-high’ in the pair. As we noted, this could be a short-side re-entry level and, once broken by a top-side move, could become a litmus to begin plotting the bullish approach in the pair. Wednesday of last week produced another inflection off of this level, and this only strengthens the case as using this for a ‘line-in-the-sand’ for top-side approaches in GBP/USD.

After that most recent resistance inflection off of the 1.2325-1.2335 zone, price action tilted lower until, eventually, the ‘post-Flash crash’ swing-low came into play. That prior low was at 1.2088, and yesterday’s price action in GBP/USD saw a bottom-side break that lasted for approximately 7 pips, at which point an aggressive bullish-reversal took place. But the fact that buyers jumped-in to the market so quickly after a new low was set may be highlighting the potential for an extended bullish move. After all, if breaks lower are being bought rather than sold even more aggressively, we may be nearing a longer-term turn in price action.

However, with such an observation traders would still want to retain prudence, as all that we know from such an instance is that sellers may be drying up; and while this can be a helpful ‘step one’ to a bullish reversal, it does little to spurn demand to actually drive prices higher. For that, we’ll likely need some help from the headlines, but in the meantime, traders can continue to watch for ‘higher-highs’ before looking to implement any bullish approaches on GBP.

GBP/USD Technical Analysis: The False Breakout as a Signal

Chart prepared by James Stanley

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

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