GBP/USD Technical Analysis: Shifting Paradigms

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Talking Points:

• GBP/USD Technical Strategy: Still longer-term down-trend; near-term threatening to show up-trend capacity.
• Given the recent shift from the Bank of England, GBP could remain an attractive candidate to marry up with the U.S. Dollar in USD-weakness scenarios.
• If you’re looking for trading ideas, check out our Trading Guides.

In our last article, we looked at a potential paradigm shift after the Bank of England revised inflation projections for the British economy at their most recent Super Thursday batch of announcements. And this didn’t just come out of nowhere, right? After the ‘sharp repricing’ after the BoE’s uber-dovish policy moves in the wake of the Brexit referendum, rising inflation in the future seemed to be a simple mathematical assumption. With the Sterling anywhere between 10-20% cheaper against many other major global currencies, products imported from these areas would have to move up in price for producers to protect margins from a plunging British Pound.

In the initial BoE meetings after Brexit, the bank was concertedly dovish in an apparent attempt to proactively offset Brexit risks. But this, of course, simply drove the British Pound lower, thereby exacerbating inflationary pressures even more. Should those inflationary forces continue to build, this could eventually force the Bank of England’s hand away from even more dovish action and this could bring a reversal in the aggressive down-trend in the British Pound.

Throughout last week, we saw this theme continuing to build as the US Dollar was selling off. But over the past few days, we’ve had another paradigm shift that can make forecasting directional biases in GBP/USD a bit of a challenge in the near-term; and we’re referring here to U.S. Presidential Elections. U.S. Presidential Elections shocked the world, and the reaction was a wild ride in the U.S. Dollar and anything paired along with it. It may take time for directional biases to form with any element of consistency, and traders may want to wait for cleaner price action in the Greenback before assigning a bias to any particular pair.

The British Pound, given this recent shift from the BoE, could remain one of the more attractive currencies to pair with the U.S. Dollar in weakness scenarios. On the chart below, we’re looking at near-term price action along with an approximately 225-pip range that traders can watch to try to get on that next directional move.

Chart prepared by James Stanley

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

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