This currency pair had been ranging over more than two weeks when it finally moved sharply lower on risk-off, strong USD sentiment following surprisingly high US jobs data at the end of last week. US Dollar strength continued initially as the new week got underway, perhaps given an additional tailwind by the brief resumption in fighting between Iran and Israel.
Now markets have got past the jobs data, and the fighting is over between Iran and Israel for the time being, we see the US Dollar start to weaken and the price move higher. The question is whether the greenback will reassert itself and drive a technically significant breakdown, or will the dominant consolidation pattern of the last few weeks reassert itself?
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US CPI Data Tomorrow May be Key Driver
Tomorrow will see the release of US CPI (inflation) data, which can be said to be the major driver of the Forex market over the past few years. This is why the question of the Dollar’s direction is timely. US inflation is the number one consideration the Federal Reserve has when it decides on its interest rate every few weeks, and interest rates are a key driver in Forex.
The rate of annualized inflation is expected to increase, but the rate of increase month-on-month is expected to slow down. Last year, inflation had begun to look like it had been conquered anew, but the oil price shock since March this year has generated a wave of inflation feeding through the global economy, so inflation data is again being scrutinized very closely.
If the inflation data is higher than expected, it will be very likely to send the price of this currency pair lower, and vice versa.
GBP/USD Technical Analysis
Despite the recent dip lower, a look at the price chart below shows ranging behaviour. The price is showing light short-term bullish momentum and is returning into the middle of its zone of comfort. There are not many key support or resistance levels which can be confidently drawn. However, there is quite likely to be new resistance at $1.3388 or $1.3409 with the latter level looking as if it will be stronger, so traders should beware when the price action approaches these levels.
The dominant consolidation suggests that the price will remain between $1.3409 and $1.3307 until the US CPI data is released tomorrow.
If the price breaks down today below $1.3300, it probably won’t last, but it is a bearish sign that markets are expecting higher inflation data. If the price breaks above $1.3409, it might not go much further but that will be a bullish sign.
The line of least resistance is downwards.
My Take on GBP/USD
I think the best approach here will be to take the area between $1.3409 and $1.3307 as today’s range, and be prepared to trade a reversal from a bounce rejecting one of the extreme points. If the bearish bounce happens at $1.3388 that is also OK, but I have more faith in $1.3409.
I doubt we will see a breakout until the US CPI data release which will happen during tomorrow’s New York session.
Review, Support & Resistance Levels
My previous GBP/USD signal on 4th June was not triggered.
Risk 0.75%.
Trades may only be entered prior to 5pm London time today.
Long Trade Idea
Long entry following a bullish price action reversal on the H1 timeframe immediately upon the next touch of $1.3307.
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 run.
Short Trade Ideas
Short entry following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.3388 or $1.3409.
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 of high importance scheduled today concerning either the British Pound or the US Dollar.
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