GBP Technical Analysis

Those three votes for a rate hike were the most since 2011 at the MPC, and this triggered fresh fears of the BoE’s massive stimulus program wreaking dire consequences on the British economy. After the ‘sharp repricing’ in the value of GBP around Brexit and then the ensuing dovish campaign from the BoE, higher levels of inflation seemed simply mathematical as importers moved prices-higher to adjust for the -20% move-lower in GBP/USD.

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As those levels of inflation began to creep-higher earlier in the year, the thought that the BoE may need to adjust rates to stem those inflationary forces began to gain steam. In March, Kristin Forbes became the first vote for a rate hike at the BoE since Brexit, and she even accompanied that vote with an op-ed in The Telegraph to explain the rationale behind her decision. Then in June, inflation for the month of May came in at 2.9%; followed by those three dissenting votes that helped to bring some life in GBP/USD. When Mark Carney himself opined on the matter towards the end of the month, saying that rate hikes may be on the horizon for the U.K., the British Pound shot-higher to trade through the 1.3000 level.
After a pullback was seen through the first two weeks of July, USD-weakness began to take over, and GBP/USD went into resumption of the bullish move after a 50% retracement, extending all the way up to fresh 2017 highs at 1.3269.

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GBPNZD has recently bounced off the top of its range at the 1.7900 major psychological level and is making its way to the bottom at 1.7400. If this holds as support, another bounce back to the resistance could take place.

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The 100 SMA is above the longer-term 200 SMA so the path of least resistance is to the upside, which means that the support is more likely to hold than to break. These moving averages could also hold as near-term inflection points.

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The British Pound has been on quite the rollercoaster so far in 2017. After coming into the year wrapped-up in Brexit worries, the pair began to show bullish tendencies as the prospect of rising inflation became more real. Inflation for the month of May perked all the way up to 2.8%, giving ammunition to bulls under the premise that the BoE might be forced away from their uber-dovish monetary stance. But after inflation came-in a bit tamer in June and July, those concerns began to recede into the background and when the Bank of England met earlier in the month of August, it appeared that those worries were ready to fade to black.

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The British Pound was rather strong coming into August, but after the Bank of England’s Super Thursday on the second trading day of the month saw the bank insert another dovish set of comments, the pair had been sliding-lower as we came into last week’s Jackson Hole Economic Symposium. As we neared the start of the event, GBP/USD moved-down to a fresh six-week-low at 1.2774. But as we heard from Chair Yellen and Mario Draghi on Friday, another gust of USD-weakness took over, and GBP/USD began to rally off of last week’s lows. This produced a morning star formation that, at least so far, has led to bullish continuation up to a key zone of resistance. The price of 1.2928 is the 50% Fibonacci retracement of the most recent bullish move, taking the June low up to the August high; and 1.2960 is a batch of swing-lows that had developed after the initial re-break below 1.3000.

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Around Fed Chair Janet Yellen’s speech at Jackson Hole, the U.S. Dollar started selling-off again, and this helped to form support in Cable around a point of prior resistance at 1.2775, leading to the morning star formation discussed in our last article, and prices have been surging higher ever since, including a topside break of the key Fibonacci level at 1.3117.

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Since that support inflection around the Jackson Hole Economic Symposium, bulls have begun to take over in GBP. This is very similar to what was seen in August, when buyers drove the currency higher leading into the rate decision under the presumption that higher levels of inflation might force the BoE away from their uber-accommodative monetary stance. Will this be the month that the BoE finally capitulates? Probably not, but as traders we have to retain vigilance on either side of the matter.

For GBP-weakness plays, traders may want to look away from the U.S. Dollar. The back-breaking down-trend in the U.S. Dollar could add complication to such strategies, and in order to sell GBP, traders may be better served by matching up what could be a weak British Pound with a currency that has recently displayed some element of strength, such as the Euro. EUR/GBP is closing in on what could be a very interesting level for such strategies around the .9000-area on the pair.

For GBP-strength, traders will likely want to exercise some patience here. One potential option is looking for higher-low support around 1.3117 in GBP/USD. The key to such an approach will be confirming that support is actually showing at the level, rather than buying on the first print below. But if this doesn’t show up, traders may have to contend with a short-term breakout. To approach such a scenario, traders can first let this batch of resistance around 1.3250 give way before plotting longer-term bullish approaches. Just above this resistance is a potentially huge zone around 1.3500, which has some historic implications for the pair. This level had helped to set the ‘Financial Collapse’ low for more than seven years (until Brexit came into the equation), and just 22 pips below we have the 50% retracement of the ‘Brexit move’ in GBP/USD. This could be an idea level to look for a near-term higher-high to prelude a higher-low support entry. Higher low support at 1.3350 or 1.3250 could be accommodative for longer-term bullish exposure in GBP.

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Though GBP/USD sliced right through 1.3450 like a hot knife cutting through butter, the bigger wave picture is still intact. Despite the Bank of England and market participants believing a rate hike is coming, the technical picture for GBP/USD is not as rosy. We believe Cable is in a terminal wave at three different degrees of trend. This suggests a reversal may be looming overhead.

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The Elliott Wave model we are following points our trend “GPS” to the coordinates of wave v of ((C)) of Y of 4. For those familiar with Elliott Wave, those first three coordinates are ending waves. That means once this move higher exhausts, GBP/USD may stage a top that lasts for several months. We are seeing a cluster of wave relationships appear in the 1.3775 to 1.3918 price zone so a reversal (if one happens) may take place there.

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Breakout Systems (indicators and the EA) from premium section -

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In the following table, you’ll find implied volatility (IV) levels for major USD-pairs looking out over the next one-day and one-week time-frames. Using these levels, we’ve derived the range-low/high prices from the current spot price within one-standard deviation for specified periods. Statistically speaking, there is a 68% probability that price will remain within the lower and upper-bounds.

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One-day implied volatility is relatively ‘normal’ across the dollar-spectrum. So far, it’s been a rather ‘ho-hum’ type of day with limited price movement, and while there is likely to be a spat of volatility following the release of the minutes, it could remain a fairly uneventful day once the dust settles through the NY close. At 18:00 GMT time, the minutes from the September FOMC meeting will be released, and again, while there aren’t big expectations for major price swings it’s always prudent to be prepared in the event of a surprise.

EURUSD

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The one-standard deviation range from the current spot price is 11770-11880. Of interest here is the alignment of resistance and the 11880-projected high. The expectation on this end is that the bounce in recent sessions is just that, a bounce, and that the eurowill roll over soon. With that in mind, sustaining overhead levels could prove difficult.

GBPUSD

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Cable has the second highest level of one-day implied volatility at 10.74%, but that is unsurprising given it also has the second highest one-week IV at 8.63%, only behind NZDUSD (which has been elevated for a while). Unlike EURUSD, there isn’t any significant confluence between the projected range levels and price levels. Cable is turning down off of resistance, which if held would mean that the 1-day projected high won’t be exceeded. But looking lower, there is nothing highly notable.

USDJPY

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The projected one-day range is 11172 to 11280. Of interest here is the range-high as it aligns with several recent closing values in the 11280/84 area. There have been a number of ‘tail-days’ where rallies failed, which points to a lower near-term bias. The one-day low is in alignment with the 11172 close on 9/25, but it’s just one day and doesn’t hold the same significant as the multiple closes seen around the top-side level.

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AUDUSD: Retail trader data shows 51.7% of traders are net-long with the ratio of traders long to short at 1.07 to 1. In fact, traders have remained net-long since Oct 24 when AUDUSD traded near 0.77751; price has moved 0.7% lower since then. The number of traders net-long is 8.2% lower than yesterday and 6.6% lower from last week, while the number of traders net-short is 2.2% lower than yesterday and 6.8% lower from last week.

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

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GBPUSD: Retail trader data shows 58.6% of traders are net-long with the ratio of traders long to short at 1.42 to 1. In fact, traders have remained net-long since Nov 01 when GBPUSD traded near 1.30522; price has moved 0.7% higher since then. The number of traders net-long is 4.5% lower than yesterday and 21.2% lower from last week, while the number of traders net-short is 10.5% lower than yesterday and 1.9% higher from last week.

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

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Since bottoming on October 6, GBP/USD has gone into a range with a small handful of powerful days, but nothing which led to follow-through. During this period one-week and one-month implied volatility declined to 6.32% and 6.72%, respectively. Since last week it has been on the rise, with current levels of 8.75% (1-wk) and 7.99% (1-mo). Not only have expectations for price movement in cable risen strongly in recent sessions, it also tops the board of major USD-pairs.

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The projected one-week one-standard deviation range is 12916-13232. Let’s take a look at how these levels align with the current technical landscape. First off, the range is running on borrowed time, which means a break is likely coming soon. With cable not finding much lift around a pair of trend-lines (March-current, lower parallel – April-current) and the October low it is becoming increasingly likely the break will come to the downside. Should we see a sell-off commence it would also be in-line with the trend off the 9/20 spike-day high which came at a confluence of the gap following ‘Brexit’ and a trend-line running down from July 2014 over the ‘Brexit’ day high.

The projected one-week low is 12916, which isn’t far from the 200-day MA currently at 12872. But the next level of price support doesn’t arrive until under 12800. With that in mind, a breakdown may lead to price expansion and even higher levels of implied volatility. On the top-side, coupling trend direction prior to the multi-week range with overhead levels and the trend-line off the September high, it looks less likely we will see a strong move higher in cable.

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