By:Mike Kulej
During the last several days, the GBP-USD showed an increased intraday volatility. The popular “cable” had daily ranges averaging 200 pips, with the largest one of almost 300 pips, which took place on the last trading day of 2010.
In spite of that, this pair does not exhibit a well-defined direction. All of the recent price swings are confined between 1.5366 and 1.5662, the extremes from December 31. Since then, the highs have been getting lower, while the lows have been climbing, in effect creating a triangle or a large pennant.
Both of these patterns are similar and most of the time have the same outcome – the price finds a new direction by breaking out of the formation. In case of the hourly chart of GBP-USD, this can easily take another 2-4 days, given the magnitude of recent swings. In reality, though, the sooner it happens, the stronger the next move is likely to be.
When the price breaks out of the pattern, other technical indicators should confirm it. The Momentum, as well as ADX, is suitable for this purpose. They should turn up, no matter the actual direction of the price. That would support the breakout and increase the probabilities of a significant move in the GBP-USD.