GBP/USD Monthly Analysis for December 2012

Conflicting fundamentals continued to plague the GBP/USD during November. On one hand, the weaker U.S. Dollar helped underpin the pair while concerns about the U.K. economy falling back into a recession during the fourth quarter kept a lid on any rallies. Additionally, investors had to deal with the possibility of a resumption of the Bank of England’s asset-buyback program which essentially injects more cash into the economy.                                                                                                    

Technically, the GBP/USD is trading inside of an elongated pennant formation. The upper end of the pennant is 1.6450. The lower boundary is 1.5640. Because of the length of this chart pattern, traders should watch for a volatile breakout once the support and resistance lines are violated. 

According to the theory of technical analysis of chart patterns, the pennant is a non-trending pattern. The gradual narrowing of the support and resistance lines compresses prices and creates conditions ripe for a breakout. 

The first sign of strength will be a breakout over a downtrending Gann angle at 1.6280. This should be followed by another breakout over a swing top at 1.6301. Although there are tops at 1.6746 and 1.7042, if upside momentum increases as expected, the market has room to run to a 50% level at 1.7346 over the long-run. 

Breaking the support line at 1.5640 is likely to trigger an acceleration into a 50% level at 1.5272. Taking out bottoms at 1.5268 and 1.5233 could lead to a major collapse in prices. 

Although the U.K. economy is exerting downside pressure on the British Pound, a resolution of the U.S. fiscal cliff crisis is likely to trigger the strong upside breakout that the chart pattern is suggesting. Over the short-run, if the pivot price at 1.5784 continues to hold as support then traders should watch for the upside breakout and increased volatility.