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Jignesh Davda

GBP/USD Bounced From a Critical Breakout Point on Wednesday

The range that has played out in GBP/USD appears to be taking the form of a flag pattern. The pair seems to have made an attempt to break lower yesterday but bears were not successful in activating the pattern.

With a relatively light economic calendar and trade war fears starting to subside a bit, a catalyst seems to be missing for a meaningful move in GBP/USD. In this context, I think the pair will continue to chop around the current area.

Fed member Evans spoke yesterday and made his stance clear on monetary policy. He acknowledged that the economy is performing well, but stated that subdued inflation alone warranted further easing of monetary policy. When combined with the economic risk created by a trade war between China and the US, a strong case can be made that the Fed needs to ease policy further.

While the economic calendar is light today, we may some volatility in GBP/USD in early trading on Friday. The latest GDP figures will be released out of the UK along with manufacturing production numbers for June.


Technical Analysis

GBP/USD broke briefly below important support yesterday near 1.2138. The price point marks a horizontal level and reflected the lower bound of a rising trend channel at that time. This channel has contained price action for most of the month thus far.

Since then, the pair is seen climbing back above 1.2153. It has held above the level in early trading today and so therefore I don’t see a reason to be bearish here.

GBPUSD Hourly Chart

If GBP/USD gets below 1.2138 on a sustained basis, it would signal that a bearish flag pattern is in play. Unlikely yesterday’s spike lower, I would look for at least an hourly close below the level for confirmation of a break.

To the upside, I see resistance at 1.2190. This level has held the exchange rate lower on several attempts over the last week. If the pair gets above the level, a retest of the upper bound of the trend channel is possible.

Bottom Line

  • A break below 1.2138 puts a bearish flag pattern in play.
  • While above 1.2150, GBP/USD can push higher in the upward consolidation that has taken place since the start of the month.
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