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GBP/USD Technical Analysis: Bullish Despite USD's 13-Year Highs

GBP/USD Technical Analysis: Bullish Despite USD's 13-Year Highs

2016-11-21 17:53:00
James Stanley, Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Near-term bullish prospects, higher-low showing at prior resistance.
  • Cable has bounced off of higher-low support, and is currently finding short-term resistance at a key Fibonacci level.
  • If you’re looking for trading ideas, check out our Trading Guides.

In our last article, we looked at the recent ramp-higher in GBP/USD with the question of whether we had established the new higher-low. And while that higher-low ended up digging a bit deeper on the chart, eventually finding support at the 1.2328 zone of prior resistance, the open of this week’s trading has seen another strong Sterling-move as the pair is running-higher.

While a potential trend-change might not be all that exciting given the current global landscape where trends are changing all over the place, the context with which this has been happening should be noteworthy: The U.S. Dollar is in the midst of fresh 13-year highs, and this is showing against most major currencies such as the Yen, Euro, Aussie, etc. But one currency that isn’t playing along is the British Pound, as the GBP/USD is merely working in a series of ‘higher-lows.’

The logic behind ‘why’ this is happening makes sense: After the ‘sharp repricing’ in the value of the British Pound around the Brexit referendum, inflationary pressure would likely begin to build, starting with imported products. And as inflation moves higher, this could force the Bank of England’s hand away from deeper interest rate cuts and even more loose monetary policy; which could drive the value of GBP-higher (removal of rate-cut bets functions similarly to increasing rate hike bets – stronger moves in the currency). The big question was when that inflation might begin to show, and how aggressively, and at that last BoE meeting we saw the bank begin to acknowledge this fact.

So, while the headlines around Brexit may still be threatening and uncertain, price action in GBP/USD has begun to move in a bullish manner after that most recent BoE meeting, forming a series of higher-highs and higher-lows. Price action appears to be working fairly cleanly with a Fibonacci retracement that can be found by taking the high on September 22 to the ‘flash crash’ low. The 61.8% retracement of this move has helped to set intermediate-term resistance at 1.2656, and the 50% retracement of this same move is showing short-term resistance at 1.2513.

With prices finding near-term resistance at this 1.2513 level, which is also near the 1.2500-psychological level, traders will likely want to wait for a stronger advance to push prices higher, at which point this current level of resistance could be near-term support.

GBP/USD Technical Analysis: Bullish Despite USD's 13-Year Highs

Chart prepared by James Stanley

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

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