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Jignesh Davda

GBP/USD Under Pressure as Market Sentiment Shifts

The markets were focused on an escalation in the trade war between China and the US in the early week which triggered a bit of a recovery in GBP/USD. Fears have since eased and GBP/USD is once again under pressure.

The dollar is bouncing back against all of its major counterparts with the exception of the Japanese yen. Despite the shift in the markets over the last 24 hours or so, safe-haven currencies continue to receive a strong bid.

The bond market is also steadily bid and developments this week have reignited views of a currency war. Earlier today, the Reserve Bank of India delivered an unexpected rate cut. The Reserve Bank of New Zealand did the same and surprised markets by cutting their interest rate by 50 basis points.

The reversal in GBP/USD has erased prior gains and taken the pair into negative territory for the week. There is a flag pattern in play, although the light economic calendar in the session ahead suggests a catalyst might not be in place for a downside break.

The highlight today will likely be Fed member Evans speech which takes place shortly after the North American open. We are more likely to see volatility in GBP/USD on Friday as the latest GBP figures will be reported out of the UK.


Technical Analysis

GBP/USD faced an important resistance confluence yesterday and sellers have dominated in the turn since. At least, that is the picture an hourly chart gives us.

I think it is important to look at the broader picture here which shows GBP/USD consolidating in range after a sharp drop. The earlier decline suggests it could fall lower. But the range signals that it can easily continue to chop around the 1.2150 area.

GBPUSD Hourly Chart

The flag pattern here should provide a better indication of the near-term price direction. If we get a downside break, it will be safe to say that most traders watching the pattern will assume the pair will at least try and retest the recent lows just below 1.2100.

There is some support in play here from a horizontal level at 1.2138 which is near the lower bound of the trend channel. So far it has held the exchange rate higher. There is also the 100-hour moving average which is near the horizontal level and channel bottom to create a confluence.

Bottom Line

  • GBP/USD is showing signs of weakness. A sustained break below a flag pattern on an hourly chart offers confirmation of more downside.
  • The support area to watch in the pair comes in around 1.2138.
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