GBP/USD Rally Stalled Ahead of Major Resistance

The GBP/USD Recovery is Impressive and Suggests Further Gains

When a down trending pair makes a strong recovery, it often signals of more gains to come. GBP/USD is a great example of this as the pair has fallen drastically since early May. This week, however, the pair not only recovered a great deal, but it did so with very shallow pullbacks.

On a weekly chart, it has nearly fully erased losses from the prior week. And last week saw a notable fall in the pair. Currently, there is some strong overhead resistance near 1.2750 that stands to cap near-term rallies. But the message I’m getting, based on momentum and recent shifts in US monetary policy stance, is that the pair intends to break it.

The BoE did not Move the Exchange Rate Much Yesterday

There was a somewhat muted reaction to yesterdays Bank of England meeting. The main takeaway that I got was that the economy is heading in the right direction, setting up a potential rate hike.

At the same time, they concluded that policy could head either way, and any necessary adjustment would be made to keep the economy on the right track. Essentially covering for Brexit risks.

I find it interesting that the Bank of England is considering a rate hike and that they are managing to hold inflation near 2%. This reminds me of earlier days when there was divergent monetary policy between the ECB and Fed, offering great trading opportunities. Theoretically, the same situation is presented as the UK is leaning hawkish while all other major economies are swinging dovish.

But the bank’s comments on keeping the policy path open reflects the uncertainty about an economy that is exposed Brexit risks. Had it not been for Brexit, GBP/USD would have been a no brainer trade. But then again, without Brexit in the picture, they probably would not be running inflation levels as high as they are now.

Technical Analysis

GBP/USD is showing some struggle to hold above 1.2700. I do see a strong confluence of support at 1.2655. It contains a horizontal level and the 100-period moving average on a 4-hour chart. Also, there is a rising trendline from this weeks low.

The hourly chart shows something similar with the 200 MA near 1.2655. So I expected declines to the level to be met by buyers. To the upside, I think 1.2747 is a very critical resistance level and I have a hard time seeing it getting breached. At least in the session ahead.

Bottom Line

• I see support at 1.2655 and resistance at 1.2747.
• There is potential for a range to end the week out
• Considering the recent upside momentum, I think the bias here is clearly to the upside.