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GBP/USD: Cable Bounce After Test Sub-1.3000, Pullback or Reversal?

GBP/USD: Cable Bounce After Test Sub-1.3000, Pullback or Reversal?

2018-07-19 19:14:00
James Stanley, Currency Strategist
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Talking Points:

- The bearish trend in the British Pound has continued and the prospect of a rate hike at the BoE’s ‘Super Thursday’ rate decision in two weeks no longer looks so likely. While we may still see a hike in November, the currency has recently been hit by a confluence of factors that doesn’t soon look to let up. Inflation has continued to disappoint, retail sales came in below expectations and the Brexit saga continues with little by the way of certainty.

- Of concern for traders is the fact that this move in GBP/USD has become quite oversold over the past couple of months. RSI divergence continues to show on the Daily chart, and we may be looking at a pullback before the longer-term bearish trend is ready to continue.

- 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.

GBP/USD Bounces After Test Below Key Psychological Support at 1.3000

The British Pound saw its down-trend continue earlier this morning, finally encroaching on the psychological level of 1.3000 for the first time in more than ten months. Prices ran as low as 1.2956 earlier in today’s session before buyers stepped in to perch prices back-above 1.3000. At the center of this reversal was a pullback in the US Dollar after comments from President Donald Trump indicated that he’s not too happy about the hawkish stance at the Fed. This comes fresh on the heels of the Greenback setting a fresh one-year high earlier this morning, and this begs the question as to whether or not we’re looking at a larger-scale FX market reversal as driven by dynamics in the US Dollar.

In GBP/USD, the trend is still bearish as the British Pound has gotten hit by a number of factors over the past few months, and more to the point over the past few weeks. While there was an existing case for strength on an economic basis earlier this week, driven by the prospect of a rate hike out of the BoE at the bank’s next rate decision in early-August, that theme has largely diminished as we saw yet another disappointing inflation report out of the UK. This was followed by disappointing retail sales data, and if we combine this data drawdown with the ongoing saga around Brexit, the backdrop no longer appears so bright for a rate hike out of the BoE in two weeks.

In response to this confluence of bearish factors, an already oversold GBP/USD broke below the key psychological level of 1.3000. Prices have not been below this barrier since early-September of last year, and this illustrates just how bearish price action in the British Pound has become.

GBP/USD Four-Hour Price Chart: Bounce After Prices Test Below 1.3000 Support

gbpusd gbp/usd four-hour price chart

Chart prepared by James Stanley

Perhaps a surprising aspect of this morning’s hastening in the bearish move has been a decrease in retail long positions over the past 24 hours. Retail traders haven’t been as actively trying to pick a bottom as one might expect with a test of such a key long-term support level in the pair. Yesterday saw approximately 74.4% (2.91-to-1) of retail traders holding net long positions in the pair: Today, that number is down to 73.8% (2.82-to-1). This indicates that we may be due for a near-term pullback while the longer-term bearish trend remains in order.

GBP/USD: Cable Bounce After Test Sub-1.3000, Pullback or Reversal?

Chart prepared by James Stanley

Pullback or Reversal

At this stage, evidence does not yet exist to suggest that this bounce is anything more than corrective in nature. The bigger quandary is when exactly the downside move might be able to push lower. We’d looked at the prospect of a pullback to the 1.3050 level earlier this morning, and that theme is playing out thus far on a short-term basis. But, with prices having already put in a reaction from that level, it may not be as opportune for short-side triggers at this point. A bit higher on the chart another area exists that could remain as interesting for bearish continuation, and this spans from 1.3083-1.3101. Resistance showing here could open the door for stops above the 1.3117 Fibonacci level.

GBP/USD Hourly Price Chart

gbpusd gbp/usd hourly price chart

Chart prepared by James Stanley

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

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