GBP/USD Technical Analysis: Pound Falls after U.K. Inflation Disappoints

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Talking Points:

- The British Pound is heading-lower after another disappointing inflation report.

- Cable is moving-down to an area of potential support around the July low, and this zone can assist with both long and short-side approaches.

- If you’re looking for trading ideas, check out our Trading Guides. They’re free and updated for Q1, 2017. If you’re looking for ideas more short-term in nature, please check out our IG Client Sentiment.

In our last article, we looked at the British Pound after a dovish Bank of England meeting sent the currency lower from fresh 2017 highs. The Non-Farm Payrolls report that took place a day later helped with the bearish move, as a short squeeze in the U.S. Dollar helped to drive prices in GBP/USD down to the psychological level of 1.3000. But as British data continued to disappoint through last week, that 1.3000 level gave way, eventually becoming resistance and continuing to show as such until we walked into the most recent U.K. inflation report this morning.

In that inflation report, prices did not rise as much as feared: U.K. inflation came-in 2.6% for the month of July, matching the June print and below the expectation of 2.7%. As we had seen with the June data, this tamer read of inflation removes some pressure from the Bank of England, who are potentially looking at ‘one and done’ rate hikes in the effort of quelling those rising prices. The near-instantaneous response from markets after that inflation print came-in was a drop in GBP, as GBP/USD fell through the previous support floor, as well as the 50% Fibonacci retracement of the most recent bullish move.

GBP/USD Four-Hour: Cable Falls Through Support Following U.K. CPI

Chart prepared by James Stanley

This bearish move in GBP/USD has brought the pair closer to a longer-term bullish trend-line, which can be found by connecting the March and June lows. Just a bit below this trend-line, we have another key level around the 1.2800-handle, as the prior test of support aligns with the 38.2% retracement of this major move (highlighted in blue, below).

Chart prepared by James Stanley

Given the veracity of recent declines, for those that are looking to play the long side of the pair, awaiting support around this trend-line down to 1.2826 is crucial . We previously discussed how traders can use price action to confirm support and resistance; and in this situation of traders looking to play a short-term reversal into the intermediate-term trend, patience is of the upmost importance in ensuring that support actually shows in this zone before looking to get long.

This zone of potential support can also assist with the short-side continuation approach. For those that are looking at taking on bearish exposure, a break of this zone can open the door for such plays, with traders looking for a break of the July low before entertaining options for bearish exposure. Upon a break of this support, traders can look to re-assign this area as resistance, looking to sell off of the zone around 1.2809 with anticipation of further lows (shown in green on the below chart).

Conversely, if the low around 1.2809 is not taken out, traders can look to play resistance off prior support (shown in red, below), between 1.2928-1.2955. If resistance shows in this zone, traders can look to place stops above the prior swing-high, around 1.3032 in anticipation of bearish continuation.

Chart prepared by James Stanley

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

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