The market environment remains one with a strong US Dollar that is overcoming most other currencies – including this one, even though we are seeing the resumption of strong risk-on environment which sent major stock markets soaring yesterday. There is little economic data scheduled this week which might affect the GBP/USD currency pair, so it could well be a week dominated by technical factors and speculators who are probably going to be hoping for a sustained bullish breakout by the US Dollar Index (DXY) well above the 100 area, which has acted as historic resistance.
The GBP/USD currency pair is certainly going to be one of the pairs in the focus of Forex analysts today and for the rest of this week, despite the dominance of Forex action by the Japanese Yen over the past couple of week, although the British Pound is not a relatively weak currency.
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GBP/USD Fundamental Analysis
The US Dollar’s fundamental outlook remains bullish in the short term. The Fed’s recent rate hike and its indication that further tightening may be necessary have lifted the Dollar Index to around 100.4, close to a seven-week high, as markets price roughly a 58% probability of another 0.25% hike in October and an approximately 90% chance of at least one further increase by December. Even more tellingly, market imply a 44% probability of two 0.25% rate hikes by the end of the December meeting. High US yields and persistent inflation risks support the greenback, although much of the monetary-policy advantage is now priced in, so weaker US data or a more dovish Fed tone could limit further upside
Sterling’s outlook is comparatively weaker, especially against the Dollar, as the Bank of England held Bank Rate at 3.75% despite inflation rising to 3.1%, while the Fed is signaling more tightening. The widening perceived Fed–BoE policy divergence is acting as the principal headwind. UK inflation and still-elevated energy costs may eventually push the BoE to hike, but its next meeting is not until November, leaving the Pound vulnerable while US rates and the US Dollar remain supported.
GBP/USD Technical Analysis
When we zoom out to a daily or longer-term chart, the price action looks consolidative: the price has been making a range between approximately 1.3650 and 1.3100 for more than the past year. Drilling down, however, shows that the price action has fluctuated between several short-term trends, but they are quite well-defined when they happen and are often contained within a symmetrical price channel of some reliability.
Right now, the daily chart is showing a bearish consolidation chart pattern: after an impulsive downwards move, backed by sentiment and fundamentals, we can see today so far is a double inside bar day, so the price is becoming quite compressed and maybe ready for a breakdown. A further bearish technical factor is the fact that this compression sits just below resistance, which has held through tests at 1.3406.
One potential obstacle for bears is the two closely packed support levels just below the current price action.
Right now, the price is trading near its recent lows, which is bearish, and looking likely to test the support level at 1.3329. Shorter-term price charts are also showing lower lows and lower highs over recent hours, another bearish factor.
GBP/USD H1 Price Chart – Bearish Consolidation Below 1.3406
My Take on the GBP/USD
On balance, things look relatively bearish, and a strong run by the US Dollar looks like it could be a real possibility over the near term. The British Pound might not be the best currency to trade short against the Greenback, but it is exposed, so it might be as good as any.
Today the price might struggle to get below 1.3310 and 1.3329, as well as the round number below at 1.3300, so today might not be the perfect day to trade – I suspect we might get some choppy tests of this supportive area before it finally breaks down.
The best opportunity might well be long scalps from any strong bounces from first touches of 1.3329, 1.3310, or 1.3300 – or some combination of more than one of them but be very cautious taking profits as you will be trading against the trend if you do this. This is probably best left to very skilled day traders.
Review, Support & Resistance Levels
My previous GBP/USD free signal on 16th September was not triggered.
New trades should only be entered prior to 5pm London time today.
Long Trade Ideas
Go long following a bullish price action reversal on the H1 timeframe immediately upon the next touch of $1.3329, $ 1.3310, or $1.3264.
Put the stop loss 1 pip below the local swing low.
Adjust the stop loss to break even once the trade is 25 pips in profit.
Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
Short Trade Idea
Go short following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.3406, $1.3463, or $1.3495.
Put the stop loss 1 pip above the local swing high.
Adjust the stop loss to break even once the trade is 25 pips in profit.
Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
The best method to identify a classic “price action reversal” is for an hourly candle to close, such as a pin bar, a doji, an outside or even just an engulfing candle with a higher close. You can exploit these levels or zones by watching the price action that occurs at the given levels.
There is nothing further scheduled today concerning either the British Pound or the US Dollar.
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