There is something unusually persistent about the current move in GBP/USD. What looked for a while like another test of a familiar ceiling now appears to be turning into something more durable, as the British Pound continues to hold its ground while the US Dollar loses more value.
The important shift is not just that the GBP/USD currency pair moved higher. It is that the breakout looks so firm and healthy, and that markets are increasingly pricing in and respecting persistent strength in the British Pound.
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Why Sterling Strength Matters More Right Now
This pair is in sharp focus today because the price action has moved through a level that traders have watched for a long time, and it has done so at a moment when the Dollar is losing support from the inflation story in the United States. A softer-than-expected US inflation print has pushed traders to reassess how aggressive the Federal Reserve is likely to be in the near term, and that has taken some momentum out of the Dollar across the board. The CME FedWatch tool has decreased its estimation of the chance of rate hikes this year.
Turning to the British Pound, it is increasingly treated as one of the stronger major currencies, helped by the viewpoint, which is gaining momentum, that the UK economy has held up better than expected and that the Bank of England still sits in a relatively hawkish position compared with to other central banks. There is an increasing fundamental disjoint between the two central banks and this is likely to excite and encourage bulls.
The Market Is Starting to Treat 1.3500 Differently
Recent price action has seen the GBP/USD currency pair make a bullish breakout not only beyond the $1.3500 round number which is an obvious barrier, but also above the confluent horizontal resistance level which was holding at $1.3489, and maybe even more significantly, above the broken long-term descending trendline which was drawn from the two-month high price. The price chart below shows that the price broke above all three potential obstacles and is now consolidating bullishly above the highest one – the trend line.
A retest of a broken trend line following a breakout can be a truly excellent signal to take a long trade entry. It is also worth noting that technically, this pair tends to be traded better as a Breakout pair than as a pullback pair, which is another reason to pay close attention to what is happening here now.
There is one concern bulls should hold – the resistance level at $1.3550 has held so far, it was a major resistance or support level when it was last tested, so it might hold today. However, if it breaks, note there is no significant resistance expected until $1.3650 or so.
GBP/USD H1 Price Chart Showing Broken Trend Line
The Danger of Overconfidence
I do not see much risk of a failure here of the bullish idea because the price is overbought – it is not. What could happen to make things go wrong for bulls is complacency leading to a fixed idea of a bullish trend. It is important that if the price retreats below $1.3500, or even worse $1.3489, that bulls abandon their bullish bias and wait for more evidence. It is easy to convince yourself of a directional scenario when the herd is moving in that direction, but traders have to balance a willingness to exit even when it might be a “mistake” with a willingness to try to participate in price moves that meet certain criteria, as today’s set up is likely to do for many traders.
There is also a tendency in breakout environments for traders to chase the breakout when it is more likely to be too late due to fear of missing out (FOMO). As we have resistance at $1.3550, the closer you can enter to that broken trend line shown in the price chart above, the better.
What Would Challenge the Bullish Shift
If GBP/USD slips back below the breakout region and struggles to hold above $1.3489, the current breakout might begin to look less like a structural shift and more like failure. This would not necessarily decisively panic bulls here, but it would weaken the idea that the market is truly ready to climb higher into blue sky.
I have to say that as breakout scenarios with this currency pair go, this one does look relatively solid. Scenarios can always collapse quickly in the Forex market though, so always be cautious.
The Next Test Is Not the Break, but the Hold
What matters now even more than the fact that the bullish breakout happened, is how the price will now behave after the breakout. This is the moment of truth – will the former resistance around $1.3500 flip decisively to become new support? The answer to this is often the best clue we ever get in the Forex market as to what is likely to happen next.
I will be very comfortable with a long trade from a bullish bounce off the trend line just below the current price position and visible in the price chart above.
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