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GBP/USD: Oversold Cable Tests Key Support Ahead of BoE Super Thursday

GBP/USD: Oversold Cable Tests Key Support Ahead of BoE Super Thursday

2018-05-07 19:30:00
James Stanley, Strategist
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Talking Points:

- The British Pound put in a stark reversal in the month of April, initially surging up to fresh post-Brexit highs on the basis of expectations around a rate hike at the Super Thursday rate decision on the docket for this week. But as the backdrop for higher rates deteriorated throughout the month, GBP/USD sold-off, and rate hike bets got kicked further-out into the future.

- GBP/USD has put in an aggressively bearish move down to a long-term support level of relevance. Bearish continuation could be a challenge given the lack of nearby points of resistance, while the door opens for bullish reversal scenarios in the pair.

- Quarterly Forecasts have just been updated, and the Q2 forecast for GBP/USD is available from the DailyFX Trading Guides Page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Want to see how retail traders are currently trading GBP/USD? Click here for GBP/USD Sentiment.

GBP/USD From Extreme Bull to Extreme Bear

It’s been a fairly active couple of months in the British Pound, and if we combine what’s become a rather pensive theme in the US Dollar, the dynamics in GBP/USD have been downright volatile. While GBP/USD came into the month of April clinging to the 2017 bullish trend, a series of events has helped to erase almost all of the pair’s 2018 gains, with prices now finding support at a familiar level around 1.3500.

The big driver on the bullish side of the British Pound this year has been the prospect of higher rates out of the BoE, largely in response to the aggressive inflation that had started to show last year. As inflation has started to slow, first evident in February and followed-thru in March, rate hike bets have gotten pushed further-out into the future. Going along with this move has been a reversal of that prior bullish trend, and now GBP/USD has run down to a familiar support area around 1.3500.

GBP/USD Daily Chart: Oversold RSI as Prices Run into Confluent Support 1.3500

gbpusd daily chart

Chart prepared by James Stanley

1.3500 With Historical Significance

The psychological level of 1.3500 has a bit of historical significance with GBP/USD, as the low from the Financial Collapse was right around this level (the proximity of which is depending on the chart or price feed that you’re looking at). This level had also helped to provide a bit of swing-high resistance in the immediate aftermath of the referendum, not being traded at again for more than a year. This price was eventually broken through in September of last year, even providing a bit of swing-low support after the first few trading days of this year.

But the relevance of this level isn’t relegated to antiquated observations, as this is confluent with the 50% retracement of ‘Brexit move in the pair’, as that marker comes in at 1.3478.

GBP/USD Weekly Chart: 1.3500 A Remaining Level of Relevance

gbpusd weekly chart

Chart prepared by James Stanley

Bearish Continuation Whilst Oversold Conditions Remain

Given the veracity of the recent bearish move, short-side continuation could be a challenge here. Not only is the move oversold on the Daily chart, but RSI has been diverging on the four-hour as well, indicating that this bearish move may be a little long-in-the-tooth; with a retracement very much needed before bearish continuation might become attractive again. On the below chart, we look at a three different areas to look for lower-high resistance; the last of which is a zone that comprises 31 pips up to the Fibonacci level at 1.3839.

GBP/USD Hourly Chart: Lower-High Resistance Potential

gbpusd hourly chart

Chart prepared by James Stanley

Reversal Potential

Until those areas of potential lower-high resistance come into play, the more attractive way of moving forward with GBP/USD could be the reversal setup. This would be looking for prices to move back after a very aggressive three-week bearish run, and each of the potential resistance levels looked at above can be used for bullish targets. If we do see a topside break back-above 1.3839, the door opens for additional strength; but this would likely need a hawkish push from the Bank of England at the rate decision later this week.

An analyst pick was just published on the bullish reversal setup, and this remains relevant until a print to fresh lows below the Fibonacci level at 1.3478.

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

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

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