GBP/USD: finally breaking out of consolidation?

<p>What a day has it been in the financial markets! Stocks and the dollar have fallen viciously as traders respond to news of the Chinese […]</p>

What a day has it been in the financial markets! Stocks and the dollar have fallen viciously as traders respond to news of the Chinese currency devaluation by piling in on safe haven assets. The Swiss franc, Japanese yen and gold have all found some solid support.

One particular FX pair that has caught my attention has been the GBP/USD, which has gained ground despite some weaker-than-expected UK economic data today which showed among other things that wages only increased by 2.4% in the three months to June compared to a year earlier period. This represents a sharp slowdown from the 3.2% rate recorded in the three months to May. But given that the pound has shrugged off the news – at least against the dollar, anyway– this is potentially good news for the Cable going forward.

Indeed, the GBP/USD appears to be on the verge of a BIG breakout. As the daily chart shows, price is peeking out of a pennant consolidation pattern and if it closes the day above these levels then we may see some solid gains in the days and weeks to come.

The Cable may already have formed a base in April when it hit a multi-year low of 1.4565. Since then, price has been making a series of higher lows and higher highs. The last major high was formed around the long-term 50% retracement level at 1.5875. For the Cable to revisit that high it will need to break decisively above the next key resistance level at 1.5670.

The bullish setup will only be invalidated if the most recent ‘higher low’ is violated. Until and unless we see that, the path of least resistance is now clearly to the upside.

15.08.12 gbpusd

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.