GBP/USD Daily Forecast – Sterling Hovers Above Critical Support

Volatility has slowed in GBP/USD despite some recent headlines out of the UK. The pair trades near an important inflection point and traders will look to US retail sales to see if it can introduce some volatility
Jignesh Davda

Boris Johnson Wins the First Round

Johnson took the first ballot by a significant lead on Thursday and looks like the prime candidate to replace Theresa May. GBP/USD, however, barely moved on the news.

The pair had started to rally in the early North American session about 30 minutes before the news released, and topped against resistance about 30 minutes after that.

Next up is US retail sales, scheduled for release in early North American trading. I think the release stands to create some volatility, but I also think that market participants will look to position for the big event next week.

Essentially, once retail sales is out of the way, I think traders will try and position for next weeks Fed meeting. There is increasing expectations for the Fed to take a dovish turn and so I expect the markets will try and get short the dollar.

A Break Lower in GBP/USD Signals a Double Top

A two-day decline in GBP/USD has wiped out all of the early week gains. The pair is now trading near support from a range that has been playing out for a little over a week.

A break lower, below 1.2655, would imply a double top. Such a pattern carries a measure move target towards this years low. At the moment, I find it hard to envision this playing out, especially with the Fed meeting looming. At the same time, it’s hard to be bullish considering the down momentum.

As an alternative, I like the short side in EUR/GBP. There are signs that the pair might be turning after a tremendous rally. Specifically, the pair is struggling to hold above 0.8900 on a sustained basis. EUR/GBP was last seen testing a declining trendline originating from this weeks high.

Technical Analysis

Not much has changed from yesterday’s daily forecast. I had been looking for recovery rallies to be capped at 1.2700 considering the confluence of resistance.

GBPUSD Hourly Chart

The 100 and 200-period moving average have diverged further to the level today, and this remains a significant upside hurdle for the pair

The main development since yesterday, is that the pair now looks to have made a sustained drop below its 100-period moving average on a 4-hour chart.

GBPUSD 4-Hour Chart

But as mentioned, I’m more focused on a break of 1.2655 to reaffirm the downside.

I think it will be important to get confirmation of a break if we get below the level. I can easily see the pair dip to 1.2650 and bounce higher. Perhaps even during retail sales as these type of reports often trigger stops and I expect stops have accumulated below 1.2655.

Bottom Line

  • A sustained break out 1.2655 triggers a double top
  • I think the dollar may come under pressure after retail sales as traders position for next weeks Fed meeting
  • 1.2700 remains critical overhead resistance. Ahead of it, the 4-hour 100 MA offers resistance at around 1.2675.
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