Cable Crushed Through 1.3000, More Pain in Store?

Talking Points:

– The British Pound has continued to sell-off after last week’s BoE rate hike. GBP/USD has now traded through the 1.3000 psychological level after catching a bounce there in July, and the prospect of further losses remains as a dovish BoE is coupled with a brutally unclear near-term future as we approach EU-UK Brexit negotiations.

– Retail traders continue to try to call a bottom on GBP/USD, which means that we probably haven’t seen that print yet. The bearish approach is complicated by oversold RSI readings on the chart, but a series of nearby resistance levels remain and can keep the door open for bearish strategies in the pair.

– Quarterly Forecasts have just been updated, and the Q3 forecast for GBP/USD is available from the DailyFX Trading Guides Page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Want to see how retail traders are currently trading GBP/USD? Click here for GBP/USD Sentiment.

GBP Bears Continue to Push After BoE

It’s been a busy past few trading days for the British Pound. This time last week, GBP/USD was re-claiming support at the 1.3117 Fibonacci level; and despite the fact that resistance continued to hold from a bearish trend-line, a Bank of England rate decision looming on the calendar for the day after kept open the possibility of a topside push in the pair. And it was just a couple of weeks before that when rumors began to float that the Bank of England may end up being more-hawkish than anticipated, helping the pair to recover after a failed attempt to take-out the 1.3000 psychological level.

But last week’s BoE rate decision was more dovish than perhaps even the most bearish BoE pessimists might have imagined, and the currency has been in a hard-sell posture ever since.

GBP/USD Daily Chart: Down-Trend Hastens in July as Prices Push Through 1.3000

Chart prepared by James Stanley

A Diminishing Case for Bullish Prospects

GBP

price action has been very bearish since mid-April. This is when falling rates of inflation brought to question the possibility of a hawkish push and, more to the point, future rate hikes out of the BoE. This theme of a dovish Bank of England was combined with a brutal amount of uncertainty on the Brexit-front as matters seemingly grew more opaque through June and into July. That uncertainty around Brexit remains, as PM Theresa May’s cabinet has seen a number of high-profile resignations and, at this stage, there is little indication as to what we can expect from EU-UK negotiations around Brexit. With very legitimate fears of a ‘Hard Brexit’ outcome, there are even fewer reasons for optimism, and this can continue to act like a wet blanket on GBP price action in the coming months.

The pair is unlikely to find much help from the Bank of England. At that rate hike last week, the BoE remained fairly pessimistic around future economic conditions, forecasting one potential rate hike ahead of 2020.

So, at this point, it appears as though the most bullish factor currently going for the British Pound and GBP/USD is just how entrenched this down-trend has become, bringing on the potential for a short-squeeze as markets re-familiarize with GBP/USD trading below the 1.3000 psychological level.

GBP/USD Daily Price Chart: RSI Making a Move Back Towards Oversold

gbp/usd gbpusd daily price chart

Chart prepared by James Stanley

Retail Still Trying to Call a Bottom – Keeps Door Open for Additional Downside

We’ve been following dynamics in IG Client sentiment around GBP/USD of recent. In July, we had used a shift within the indicator to open the door for a counter-trend position up to the 1.3200 handle, which happened to be the area that helped to mark the three week high in the pair. But as prices broke-lower, retail traders got back into the bottom-calling mode and net-long retail sentiment has continued to grow in the pair ever since.

Given the contrarian nature of retail sentiment, this keeps the door open for further downside, even despite the oversold nature of the current move.

Want to see how retail traders are currently trading GBP/USD? Click here for GBP/USD Sentiment.

Retail Sentiment Remains Heavily Net Long in GBP/USD at 2.86-to-1

gbp/usd gbpusd ig client sentiment

Chart prepared by James Stanley

GBP/USD Strategy

The primary challenge with GBP/USD at the moment is finding an adequate entry point. The trend remains fairly strong, and there’s valid reason to expect that trend to continue. But this has been so pronounced that any retracements so far this week have been quickly sold before resistance could come into play.

This type of environment is generally where traders, particularly newer traders, will abandon their discipline in order to buy or sell in hopes that volatility continues to show. This usually works out to those traders’ detriment and long-term, it’s not a feasible way of managing a trading account. More proactive, however, could be to wait for resistance to show at which point stops can be set to a palatable amount, allowing the trader to look for the trend to continue without taking on an extreme amount of risk for doing so.

On the below chart, we’re looking at three potential resistance levels inside of the 1.3117 Fibonacci level, each of which can keep the door open for downside continuation in GBP/USD. If we have a topside break above 1.3117, that would mean we also have a violation of the bearish trend-line, which would likely mean that something has shifted in either the backdrops of Brexit, the BoE, or the US Dollar – and at that point the bearish stance should be re-investigated.

GBP/USD Hourly Price Chart: Lower-High Resistance Potential For Bearish Continuation

gbpusd gbp/usd hourly price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

— Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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