GBP/USD backs off from range breakout

<p>GBP/USD rose to the brink of breaking out to the upside early on Monday, achieving an intraday high of 1.5687, before retreating and continuing the […]</p>

GBP/USD rose to the brink of breaking out to the upside early on Monday, achieving an intraday high of 1.5687, before retreating and continuing the range-bound trading that has characterized the currency pair for the past month.

The high that was reached on Monday was little more than a pip shy of the range’s 1.5688 resistance high in late July. The lower border of the range is right around the 1.5450 support level, despite an intraday dip in early August that briefly sank below that support.

GBP/USD Daily Chart

 

This month-long trading range, which has been accentuated by a relatively flat 50-day moving average running consistently through the middle of the range, has been partly the product of shifting expectations with regard to the likely timing of interest rate hikes in the UK and the US. While both rate hikes are largely seen as virtually inevitable, the timing of such hikes have continued to be the focus of speculation.

Some further clarity on this timing may be provided this week, as the UK Consumer Price Index (CPI) is released on Tuesday and its US counterpart is released on Wednesday. Additionally, minutes of the last FOMC meeting in the US will also be released later in the day on Wednesday. Therefore, this data-heavy week could see some elevated volatility for the currency pair that could potentially lead to a breakout of the range.

If the Bank of England continues to sustain the market’s data-driven expectations that it will raise rates after the Fed, as has recently been the case, a downside move deeper into the range could prompt a potential range breakdown and then a possible move back down towards the 1.5200-area support target.

Any significant upside surprise on tomorrow’s UK CPI data, however, could possibly change those market expectations and finally result in a range breakout, in which case the 1.5900 resistance level serves as the next major upside target.

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