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GBP/USD Technical Analysis: Constructively Bullish

GBP/USD Technical Analysis: Constructively Bullish

2016-12-08 17:48:00
James Stanley, Strategist

GBP/USD Technical Analysis: Constructively Bullish

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Talking Points:

  • GBP/USD Technical Strategy: Near-term bullish prospects remain in GBP; GBP/USD range-bound despite the U.S. Dollar’s relentless top-side breakout.
  • Cable is continuing to find support and resistance inflections off of the Fibonacci retracement that we discussed last week.
  • If you’re looking for trading ideas, check out our Trading Guides.

In our last article, we looked at how the British Pound was one of the few currencies around-the-world that was as strong as the U.S. Dollar during the currency’s blistering bullish move in the month of November. While the Dollar was breaking-higher to set fresh 13-year highs, GBP/USD remained in a relatively tight range, highlighting the fact that while the U.S. Dollar was strong, so was the British Pound.

And given the context of the environment, this made sense. The British Pound fell aggressively around Brexit, and in the aftermath, the Bank of England talked up extremely dovish policy measures which drove the currency even-lower. For much of October, there was little reason to be bullish on Sterling given this extremely bearish backdrop, accented with a great deal of uncertainty around how Brexit might actually get executed. But as we warned in mid-October, rising inflationary forces in response to this ‘sharp repricing’ in the value of the British Pound could potentially stem the Bank of England’s overt-dovishness.

Towards the end of October, bearishness appeared to be starting to dry-up; and in early November we saw the Bank of England begin to acknowledge the stronger-pace of inflation, and matters haven’t really been the same for the British Pound ever since.

November’s Super Thursday batch of announcements saw the British Pound breakout above a key zone of prior resistance at 1.2325, putting in the first bullish indication for the pair since the ‘flash crash’ even in early-October. Two weeks later this area of prior resistance came-in as support, and this led to another run of higher-prices that saw another fresh-high come-in around the 1.2750 psychological level.

After multiple rebukes at the 1.2750 area of resistance, price action has begun to retrace-lower. At this point, traders looking to get-in on the up-trend in Cable are likely looking for that next higher-low; and the post-Brexit Fibonacci retracement can still be helpful for such an approach. This Fibonacci retracement can be found by connecting the high on September 22nd to the low on October 6th. The 50% retracement of that move at 1.2513 helped to set resistance while the pair was showing range-bound tendencies in the face of last month’s Dollar-strength, and given this level’s proximity to the major psychological level at 1.2500, this could be an opportune zone to look for that next area of ‘higher-low’ support.

On the resistance side of Cable, traders would likely want to use the 61.8% level at 1.2656 from that same retracement that had helped to set a prior swing-high in November. The major psychological level at 1.2750 becomes another potential resistance level given the recent reaction, and the 76.4% retracement at 1.2834 could be a third level to watch for resistance and for profit target placement.

GBP/USD Technical Analysis: Constructively Bullish

Chart prepared by James Stanley

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

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