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GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

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Talking Points:

  • GBP/USD Technical Strategy: Long-term: range-bound; short-term: bullish.
  • Dollar-weakness after the FOMC rate hike last week started the bullish trend in Cable – but it was this week’s UK inflation print that’s extended the move with the potential for more near-term up-side.
  • If you’re looking for trading ideas, check out our Trading Guides. They’re free and updated for Q1, 2017. If you’re looking for ideas more short-term in nature, please check out our Speculative Sentiment Index Indicator (SSI).

In our last article, we looked at the multi-month range in GBP/USD while price action was sitting very near support ahead of some key event risk. On the immediate horizon was the Federal Reserve’s well-telegraphed rate hike, another Bank of England rate decision in which little was actually expected, and yet another example of higher-than-expected inflation out of the U.K. We discussed these fundamental themes in-depth in last week’s Fundamental Forecast for the British Pound.

The net result for all three of these drivers was a stronger spot price in Cable. The Federal Reserve rate hike produced Dollar-weakness as the Fed inserted a heavy dose of caution and dovishness along with that move. The Bank of England rate decision saw the first vote within the MPC for an actual rate hike, as Kristin Forbes dissented against keeping rates pegged to the floor; and then the meeting minutes indicated that Ms. Forbes may not be alone in her dissenting at future rate decisions.

GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

Chart prepared by James Stanley

The big driver here is that potential for higher-than-expected inflation. After the ‘sharp repricing’ in the value of the British Pound around Brexit and then the ensuing dovish campaign from the Bank of England, the prospect of rising inflation seemed arithmetic. When a currency falls by 20% in value in a very short span of time, companies importing into that economy are going to take notice. And they’ll likely adjust prices-higher to account for the weakened exchange rate because they don’t want to see their profit margins disintegrate.

So, ever since the ‘flash crash’ in early-October, that’s been the prerogative in Cable: Looking for higher rates of inflation in order to read when the BoE may a) step away from emergency-like accommodation and, eventually b) start looking at potential rate hikes to stem rising inflationary forces.

On Tuesday of this week we got the most recent data point for UK inflation, and this is data for the month of February. Inflation came-in at an annualized rate of 2.3%. This is well-above the BoE’s target of 2%, the expectation for inflation during February to have been 2.1%; and heavily above the print in January of 1.8%. Trades have rushed to close up prior short-positions as price action in Cable has squeezed higher; with current resistance showing off-of the 1.2500 psychological level.

This carries the potential for bullish-continuation. The likely determinant for just how much continuation is probably going to come from how deep this run of USD-weakness may last. For those looking at longer-term setups, the range in Cable still persists and this should denominate approaches until the range breaks; in one direction or the other. If this recent bout of strength can pose a test beyond resistance, we may have the possibility of a bullish trend developing in GBP/USD. But this would likely need to be coupled with a strong break-lower in the Greenback, which can be difficult to surmise in an environment in which we just got a rate hike a week ago.

GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

Chart prepared by James Stanley

For those that are looking to press near-term strategies, the current zone of resistance at 1.2500 could be a big ‘tell’ level. If bulls are able to drive prices above this level, there’s another potential area of resistance at 1.2552. This could be an ideal area to look for secondary resistance; at which point 1.2500 could be re-assigned as support in the effort of catching a higher-low on the near-term Cable chart:

GBP/USD Technical Analysis: Range Persists, but BoE on Defense with Inflation

Chart prepared by James Stanley

— Written by James Stanley, Analyst for DailyFX.com

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Analys från DailyFX

EURUSD Weekly Technical Analysis: New Month, More Weakness

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What’s inside:

  • EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
  • Resistance in vicinity of 11825/80 likely to keep a lid on further strength
  • Targeting the low to mid-11600s with more selling

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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.

Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.

EURUSD: Daily

EURUSD Weekly Technical Analysis: New Month, More Weakness

—Written by Paul Robinson, Market Analyst

You can receive Paul’s analysis directly via email bysigning up here.

You can follow Paul on Twitter at@PaulRobinonFX.

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Euro Bias Mixed Heading into October, Q4’17

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Euro Bias Mixed Heading into October, Q4'17

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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British Pound Reversal Potential Persists Heading into New Quarter

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British Pound Reversal Potential Persists Heading into New Quarter

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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