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Talking Points:

- The British Pound has opened Q3 on a bright note, holding the support that came into play two weeks ago and rallying for most of the week. This was helped by some positive comments from BoE Governor, Mark Carney, that helped to push odds for an August rate hike above 60%.

- Traders are going to want to be careful of carrying weekend exposure in the British Pound as we near a key point in ongoing Brexit discussions. Theresa May has invited her cabinet to her country estate in Chequers to hammer-out the country’s official position on Brexit. This summit is expected to last late into tonight, and we likely won’t have the official government-issued white paper until some point early next week. A number of issues remain contentious between hard-Brexiters and soft-Brexiters within Theresa May’s cabinet, and the results of these discussions could continue to bring volatility into the British Pound.

- Quarterly Forecasts have just been updated, and the Q3 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.

A Bright Start to Q3 for GBP/USD

The British Pound put in a surprisingly strong performance in 2017, led in large part by higher rates of inflation that made the prospect of more BoE rate hikes seem quite a bit more likely. And that strength largely remained through the first quarter of this year as GBP/USD moved back-up to pre-Brexit levels. But Q2 was not so kind to the British currency, as a draw on inflation and a disappointing GDP print in April helped to reverse that bullish theme, and for the rest of Q2 sellers remained in control as the pair fell by more than 1,300 pips. This marked a full-scale move from the 78.6% retracement of the Brexit move all the way down to the 38.2% retracement of that same study.

GBP/USD Weekly Price Chart: Q2 Sell-Off From 78.6 to 38.2 Fibonacci Retracements

gbp/usd gbpusd weekly price chart

Chart prepared by James Stanley

As we opened into Q3, we had looked at the British Pound as a candidate for a bullish reversal, very much driven by the prospect of a hawkish shift within the Bank of England. While the BoE took a dovish outlook to markets at their May ‘Super Thurday’ rate decision, June brought a far different tune as we had three dissenting votes cast in favor of an immediate rate rise. Given the BoE’s pattern of only posing rate moves at ‘Super Thursday’ events, this caught many by surprise, and this highlights the potential for a rate hike at the bank’s August or November rate decisions.

That theme caught a bit of additional motivation earlier this week when Mark Carney shared a positive view on the UK economy, helping to firm odds for a rate hike in August above the 60% marker. As we wrote, this could help to bring back the bullish appeal in GBP/USD; but traders would likely want a bit of additional confirmation before positioning for such. We were specifically looking for a top-side break of the three-week high around 1.3315 to open the door, as this would give us a trend-line break along with fresh higher-highs, and this could continue to be an initial barrier to investigating bullish strategies in GBP/USD.

GBP/USD Four-Hour Price Chart: Continued Recovery Potential

gbpusd gbp/usd four hour price chart

Chart prepared by James Stanley

Weekend Risk

This weekend brings considerable risk for the currency as we’re nearing a key point in ongoing Brexit discussions. Theresa May has invited her cabinet to her country estate in Chequers with the goal of hashing out the UK’s official position for Brexit negotiations. Any details aren’t expected until after market’s close, and we’re likely going to have to wait until early next week for the official, government-issued white paper; but this has the potential to significantly change the direction of the currency as a major risk looms large.

As such, traders are going to want to be extra careful if holding exposure in GBP this weekend, as the potential for gaps is a bit-higher than usual given this developing driver in the currency. Proactively, traders can wait for next week’s open, at which point a bullish break above that 1.3315-1.3320 area could re-open the door for bullish positioning.

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

Contact and follow James on Twitter: @JStanleyFX