GBP/USD: Cable Chaos Ahead of Quarter-End, Trend Remains Bullish

Talking Points:

– Volatility is showing in GBP/USD after the pair pushed up to fresh highs earlier this week. A deep pullback was met by a pronounced response at support yesterday; but that strength has been unable to hold, building into a short-term head and shoulders pattern that we looked at below.

– The British Pound was very weak in February and very strong in March; pointing to the possibility of the return of the longer-term up-trend in the pair. As we move towards the Bank of England’s May rate decision with growing probabilities of another rate hike, the backdrop could remain as supportive for Sterling gains.

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GBP/USD Shakes Near the Top

The month of March has so far been marked by a return of strength in the British Pound. Putting the matter in scope, the economic drivers out of the UK weren’t all that great. Inflation came-in at a six-month low; this has been a big driver behind the currency, and it disappointed for the first time in months. But – we did see a hawkish shift at the Bank of England, with two dissenting votes cast for an immediate rate hike in March, which would be an abnormality given recent history. It also appears as though the Bank of England is preparing markets for a rate move in May at the bank’s next Super Thursday event, which is where the BoE has shown a higher tendency to make actual changes to policy. And the icing on the cake was hope on the Brexit front. On net, bulls have returned to the British Pound, breaking above the bearish trend-line that had built-in off of the January highs.

GBP/USD Four-Hour Chart: March Strength Breaks Bearish Retracement Trend-Line

Chart prepared by James Stanley

The excitement behind this month’s bullish push pertains to the alignment of longer and shorter-term trends in the pair. The bullish trend that started in March of last year very much remains in order, and after the bullish breakout two weeks ago, both themes were and have been pointing higher.

GBP/USD Daily Chart: Longer-Term Bullish Trend Remains In Order

Chart prepared by James Stanley

Short-Term Head and Shoulders

Near-term price action in Cable has started to get very messy over the past couple of days, and with quarter-end fast approaching, this is understandable. But those trends are both still bullish in nature, and the complication would be one of near-term positioning in the pair. After prices volleyed up to that fresh seven-week high of 1.4240, bulls began to lose enthusiasm and prices posed a quick drop down to the third area of support that we looked at earlier this week. That support came-in around 1.4067, and prices quickly moved back towards prior highs. But, once again, bulls lost momentum just shy of the target, and this equates to a lower-high.

On net, this has produced a short-term head and shoulders pattern, which could be pointing to additional downside before the longer-term bullish trend is ready for resumption.

GBP/USD Hourly Chart: Support Won’t Hold Forever

Chart prepared by James Stanley

Moving Forward

There is a bullish setup here that can be worked with now, but this would largely be looking at support around 1.4067 to hold, opening the door for targets around the 1.4200 area. This could be a little bit more difficult to work with given how many tests we have seen around that support already since the breakout from two weeks ago.

More interesting, however, would be a slightly deeper test towards the 1.4050 area, as this would likely take out a number of stops by taking out that swing-low. This would also allow for bullish setups based on a defense of the 1.4000 psychological level, with stops investigated below the 1.3982 swing-low from last week.

GBP/USD Hourly: Deeper Support Potential, Defense of 1.4000 Psychological Level

Chart prepared by James Stanley

The Other Side of GBP/USD

For traders looking to line up bearish scenarios behind GBP/USD, traders could look to the head and shoulders pattern that we pointed out on the hourly. The range from support to resistance there is approximately 180 pips, would denote a measured move towards 1.3900 if that setups is to play out.

This would allow for a break of support at 1.4067 to open the door for a re-test of 1.4000; after which targets can be directed towards the 1.3900 handle, which had helped to show some support in mid-March.

To read more:

Are you looking for longer-term analysis on GBP/USD? Our DailyFX Forecasts for Q1 have a section specifically for GBP/USD. We also offer a plethora of resources on our GBP/USD page, and traders can stay up with near-term positioning via our IG Client Sentiment Indicator.

— Written by James Stanley, Strategist for DailyFX.com

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