GBP/USD tests key pre-Brexit resistance levels
Fawad Razaqzada January 18, 2018 1:12 PM
The pound made headlines yesterday as it rallied sharply to a new post-Brexit high of about 1.3940 against the dollar.
The pound made headlines yesterday as it rallied sharply to a new post-Brexit high of about 1.3940 against the dollar. But it wasn’t able to hold onto its gains as the dollar made a comeback across the board. The greenback bounced perhaps because of the fact that the implied probability of the Federal Reserve hiking interest rates three times this year rose to 55% from about 48% on Tuesday. This brought the market’s view in line with the Fed’s own projections. Though we had a stronger-than-expected industrial production figure out of the US, there was no obvious trigger for the increase in rate hike expectations. Further strengthening of US data should help to encourage the Fed from tightening its belt. Meanwhile the FOMC knows very well that there are increased risks that the dollar will likely appreciate in value over time as the Fed further tightens its belt. But the dollar’s weakness throughout 2017 and at the start of this year means, unlike for the ECB, that the exchange rate isn’t a big issue for the Fed when it comes to making a rate hike decision – at least for now anyway. So, it could be that the soft dollar has actually helped to raise market’s expectations about US rate hikes.
If the dollar were to make a more meaningful comeback then out of the major currencies, those where the central bank is still dovish should lose out against the greenback. But even the rallying pound could come under some short term pressure, not least because of technical reasons. Yesterday saw the GBP/USD rally sharply into a key resistance area which we had previously identified. As can be seen on the chart, the cable probed liquidity that was resting between 1.3835 and 1.4015, the pre-Brexit low. Once support, this area was always going to provide some resistance and so it proved yesterday as price gave back a big chunk of its advance here. Whether or not resistance will hold here for too long remains to be seen, however. Indeed, the GBP/USD was trading higher again at the time of this writing. But there’s still the potential we could see at least a short term top in this region given the technical and psychological significance of these levels. The sellers will need to chop some wood, though, as the trend is clearly bullish for now. There are lots of support levels that need to be taken out in order for the bulls to lose control in a meaningful way. Among other levels, 1.3500/5 is important to watch as this was the base of the latest breakout. If this level fails to hold as support then we may see a sharp pullback towards the next support at 1.3655, 1.3610 or possibly 1.3555 next.
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.