A U-Turn in GBP/USD From a Mix of Catalysts
GBP/USD was on the verge of breaking above a resistance level that has held it lower since late May, ahead of yesterday’s US inflation data. The data release was not sufficient for a break, leading to a turn lower as the dollar gained broadly.
Shortly after the inflation data, Brexit related news drove the pair even lower, with momentum behind the decline. Specifically, a motion put out to discuss implementing legislation that would prevent a no deal Brexit, was denied in parliament.
Has GBP/USD Reversed Course?
Looking at the downward momentum, it would be easy to jump to that conclusion. However, as discussed in yesterday’s daily forecast, the pair remains within a range that has been playing out for a little over a week.
A break of range support at 1.2660 implies a double top and would carry bearish repercussions. Personally, I don’t see how a downside break ties in with the recent bout of dollar weakness.
It could be a case where Sterling diverges from the rest of the majors. Or perhaps the dollar has bottomed. For now, neither of these scenarios appear probable to me. Perhaps more price action will clarify the outlook.
Technical Analysis
In assessing whether the current decline is just a dip or the start of a new downtrend, I am focused on a horizontal level at 1.27. I think the pair needs to get above this level to reinforce that the pair is still within the uptrend that started at the end of May.
Notice on the hourly chart that the 100 and 200-period moving averages are converging towards the level. This creates some pretty strong overhead resistance.
On the other side, as mentioned, it will take a break below 1.2655 support to really open up the downside. If a double top comes into play, it would signal a move back towards this years low around 1.2560.
For now, the 100 hour moving averages seems to be holding the downside.
Bottom line
- It’s too early for me to start taking a bearish stance
- A break of 1.2655 activates a double top pattern
- Critical resistance is at 1.2700. A sustained breach above it would start to shift sentiment away from the bearishness implied by the recent momentum driven decline.
