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Talking Points:
- GBP/USD Technical Strategy: Bigger-picture trend still bearish, recent price action posed a tepid break of support which may be alluding to an extremely oversold state in the pair.
- The BOE unloaded a virtual artillery of stimulus at their most recent meeting with hints towards additional rate cuts down-the-road.
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In our last article, we looked at the range that had built in the Cable’s price action as we approached a Bank of England meeting that was carrying expectations for a rate cut at nearly-100%. And as we mentioned, rips higher in the pair would likely be sold as investors attempted to position-in ahead of the Bank of England’s expected cut. What was not expected, however, was how aggressively the Bank of England would move at their most recent meeting; not only cutting rates but increasing QE and even expanding bond purchases to include British Corporate bonds at a tune of £10 billion for a market that has only around £150 billion of face value.
Nonetheless, this bazooka of stimulus merely brought the Cable down to the support-side of that prior range, sticking above the major pscyhological level at 1.3000 in the immediate wake of the announcement. The support side of that range didn’t begin to face tests until after the Non-Farm Payrolls report the following morning, and this is when the U.S. Dollar strengthened significantly on the back of a blowout jobs-print from the U.S. In the follow-thru of that strength, GBP/USD finally sank below the 1.3000 big figure, only to bounce back shortly thereafter.
So while the down-trend here has been extremely strong, particularly if we incorporate the Brexit price action in the pair, this market is significantly oversold. And while that doesn’t necessarily preclude the possibility of continuation, it does denote the necessity of caution around short-side setups. Price action in the cable has had a tendency to reverse as prices dip below this 1.3000 psychological figure, so traders would likely want to moderate their bearishness while so near ‘bigger picture’ support values.
On the bullish side, there are complications here as well: Over the past two days the U.S. Dollar has sold off with aggression, and this has surely contributed somewhat to the bounce in GBP/USD; but the strength in the Cable over this same span of time has been far less than the weakness in the U.S. Dollar, and this alludes to the fact that traders may be using these bounces higher to merely sell the Cable at a better price.
To take advantage of this, traders can merely cast their resistance targets a bit higher to wait for that next inflection before looking to take a short-side swing in the pair. On the chart below, we identify three such levels based upon recent price action structure in GBP/USD.
Created with Marketscope/Trading Station II; prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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