GBP/USD Holds Above 1.3000 Ahead of BoE: Can Bulls Sustain the Move?
GBP/USD Talking Points:
- The British Pound continues to see Brexit-driven volatility from a multitude of headlines produced on the topic, but the recent emergence of a bullish bias has continued to hold as we’ve seen a series of higher-lows continue to print over the past week.
- The response upon tests of fresh highs and prior resistance in GBP/USD, however, hasn’t been as strong, and this has helped to begin to build prices into a short-term rising wedge pattern, which will often be approached for bearish reversals. Key to this theme will likely be the US Dollar, as a re-emergence of the USD weakness that became so commonplace last year could help to continue the topside push in GBP/USD.
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Bank of England is On Deck – But Focus Remains on Brexit
Tomorrow brings a Bank of England rate decision, and after last month’s rate hike, expectations for new information are minimal. The bigger item around the British Pound at the moment is one of a more uncertain nature, as Brexit headlines continue to drive the flow in GBP. We discussed this last week as some rather sharp topside moves had started to show in the currency, and those bullish pushes were linked very closely to positive headlines around Brexit developments.
After the EU’s Chief Negotiator mentioned that the EU would be open to a post-Brexit partnership with the UK, the persistent down-trend that had enveloped GBP and GBP/USD for much of the prior four months has further come into question. As we wrote in late-August on the heels of those Barnier comments, that announcement had the potential to shift the tides of fear that had built around Hard-Brexit or No-Deal Brexit scenarios. But – as we also mentioned, given the pensive nature of this theme around Brexit, this would be unlikely to be a smooth ride; and that’s largely held up as we’ve seen a jagged movement over the past two weeks with a slight tinge of a topside bias.
Below, we look at the higher-lows that have printed over the past week, but we’ve also applied a trend-line atop recent price action to illustrate how this bullish response has been far more noticeable at support than resistance. This is the early stages of a rising wedge pattern, and this will often be approached in a bearish fashion, looking for a reversal of the bullish move as buyers haven’t yet shown the same type of enthusiasm at highs as what’s been seen at or near lows.
GBP/USD Four-Hour Price Chart: Building into a Rising Wedge
Chart prepared by James Stanley
Taking a step back, this near-term formation places emphasis on the 1.3117 level, which is the 38.2% retracement of the Brexit-move in the pair. The Fibonacci retracement produced from that major move has marked both the April top and the August bottom; and for those that are looking for a continuation of strength in GBP/USD, a topside test of this level could be a key determinant as to the pair’s bullish potential. As we wrote on Monday, for those looking to implement a topside bias, allowing that level to come into play could then open the door for higher-low support. This could be sought out around the 1.3000 psychological level or, potentially, a bit deeper around the prior zone of resistance-turned-support that we’ve been following from 1.2918-1.2956.
GBP/USD Eight-Hour Price Chart: Messy Near-Term
Chart prepared by James Stanley
Also of note here is the fact that we’ve just begun to test the 23.6% retracement of the four-month down-trend that ran from April to August. This takes place at 1.3067, and helps to produce a zone of resistance potential that runs for the next 50 pips higher on the chart.
GBP/USD Daily Price Chart: Beginning Test of 23.6% Retracement of April-August Down-Trend
Chart prepared by James Stanley
The Big Question: The US Dollar And Whether We Revert-Back to the Prior Down-Trend
While Brexit headlines are sure to keep the pair on the move, a big driver to this theme and the longer-term performance in GBP/USD will likely be what happens from here on the US Dollar.
Last year’s bullish trend in GBP/USD was very much helped by the -15% sell-off in the US Dollar; and that April reversal in Cable mirrors the bullish shift that took place in USD around the same time. Of recent, that bullish theme in USD has started to come into question, and as the US currency further displays indications of breaking-down and reverting back to the 2017 down-trend, this keeps the door open for bullish scenarios around GBP/USD, particularly if the Hard-Brexit option stays out of the headlines.
But we are still at the early stages of that potential shift, and as prices have just started to test the 23.6% retracement of that prior down-trend, traders will likely want to move forward with extreme caution until more confirmation of strength is evident.
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.
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.