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Jignesh Davda

Failed Breakout Puts GBP/USD at Risk of Further Losses

Over the past two weeks, GBP/USD has shown a pattern in terms of price action. The pair has consolidated for most of the week, only to break higher in the late part of the week.

Last week, the pair broke above some major resistance when it started rallying, however, the exchange rate failed to hold above it. Combined with some other technical developments, this could cause a pullback after an impressive rally that started early in the month.

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From the fundamental side of things, ongoing Brexit developments will continue to be important.

British Prime Minister Boris Johnson will meet with several EU officials on the sidelines of the United Nations General Assembly that takes place in New York. However, he has already cautioned not to expect any progress in Brexit talks from this meeting.

The main hold up in reaching a deal is the Irish backstop which the UK has demanded be removed. EU officials are starting to come around on the idea that the United Kingdom won’t make a deal unless this issue is resolved. At the same time, there has not been a concrete solution that satisfies both parties.


Technical Analysis

The failed breakout last week has resulted in an exhaustion candle on the GBP/USD weekly chart. This candle closed below important resistance, hinting of a correction to come.

Specifically, the resistance the pair is faced with here, besides the psychological 1.2500 level, is the 20-week and 100-day moving averages.

GBPUSD 4-Hour Chart

Further, the pair has broken lower from a rising trendline that extends from the low posted on September 12.

In the session ahead, I expect recovery rallies towards the 1.2500 price point will be met with sellers. Just ahead of it, I see more resistance at 1.2486.

A potential downside target, if a broader correction takes place, comes in at 1.2373. This level was important resistance for the pair in the second week of the month.

Bottom Line

  • Several recent technical developments suggest GBP/USD can correct lower from here.
  • Johnson will meet with EU officials in New York but has warned that it is unlikely the meeting will further progress in Brexit talks.
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