The forex market is very tricky. It has routinely proved that no one can really master it with complete authority. This is perhaps why, while some traders might be surprised at the position the GBP/USD currency pair has taken recently, there are those who knew this was going to happen at some point.
The Cable, as it is popularly known, seems to be suffering a downward exhaustion after a steep decline in recent weeks. More significantly, the pair seems to be holding firm at a key support level 1.3500, which in the world of forex would signify that the large financial institutions and hedge funds might be closing positions on some of their recent shorts.
When you look at the chart below, you will notice that most key support and resistance levels tend to happen within these psychological comfort zones.
In the case above, we can clearly see GBP/USD having experienced some key support at (S1) 1.3500, while (S2) is just down below at about 1.3300. Even when you look down further, (S3) also appears to be at around the 1.3000 level. Of course, it could be that most traders exercise their positions just before the key psychological level is reached, or shortly after. The same goes for resistance levels (R1) at 1.3600, (R2) at 1.3800, and (R3)1.4000.
But the key point is that from a technical perspective, the GBPUSD currency pair now seems well poised for a rebound following the recent plunge.
The question though is whether the rebound will be nothing more than a ‘Dead Cat Bounce’, especially given the fundamental pressure that Sterling Pound is under from the Green Buck.
With the Bank of England issuing another tepid comment on inflation and a potential rate hike, nothing much is going in the way of the Pound fundamentally. As such, the current resilience can only be described technically.
However, there are suggestions investors are expecting a strong wage growth, which from an economic perspective is good for the Pound. In addition, the U.K. unemployment rate is at a 4-decade low of 4.2%, which again indicates that despite the fact a lot of economic data has been dovish recently, some of the basic requirements for a strong economy are still holding steady.
However, the U.S. unemployment rate is even lower while the Green Buck continues to enjoy stronger fundamentals. While expectations on U.K. rate hike remain tamed, the U.S. is looking forward for more rate hikes this year. The inflation rate is also better while the non-farm payrolls continue to impress month after month. This is why Sterling’s resurgence against the dollar is likely to be short-lived.
This case is also well supported when you look at the daily chart.
The GBP/USD currency pair went through a major trend reversal between mid-2016 and early 2017, which marked the end of a two-year downward trending movement as demonstrated in the chart above. The current upward trending channel may not be as steep as the downward trending channel but, GBP/USD pair recently went through a double-top pattern, which technically can trigger a trend reversal.
As illustrated, a double-bottom triggered the downward trend reversal to set up the current bullish channel. No channel has formed after the double-top yet, but the recent resilience of the GBP/USD pair at the 1.3500 level suggests that it could be on the cards.
So, what does this mean?
Generally, given the downward exhaustion, traders will be looking at a temporary surge in the Cable, potentially moving towards 1.3800 or even 1.4000 represented by R2 and R3 in the 4-hourly chart (first image).
And with no strong fundamentals supporting Sterling’s resurgence against the Dollar, a pullback will be expected. The 1.3800 and 1.4000 also are key psychological resistance levels at this stage and a lot of profit-taking might be witnessed once the pair hits those levels.
The resulting pullback, which as expected could be supported by strong U.S. economic data could easily help the pair breach downwards the 1.3500 key support level. This would then trigger what could become a major downward trending channel characterized by a series of lower highs and lower lows.
In summary, eyes will be on the Bank of England for the coming weeks and months as investors continue to anticipate a rate hike announcement. It could as well be what triggers the resurgence of the GBP against the dollar albeit on a short-term basis. Once the U.S. hikes rates again as expected in addition to the strong economic data the Green Buck enjoys, we could see a major movement southward for the GBP/USD currency pair.
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