GBPUSD is on the brink of finishing another week in the red. The pair has now spent the better part of ten months trending lower, not including the selloff that began in July of 2014.
I commented on the pound last Friday ahead of non-farm payrolls and asked the question, will NFP confirm the 730-pip reversal pattern?
We now know that it did not confirm a reversal and instead sent the pair lower by 180 pips following the announcement.
However, in that same commentary, I also noted that 1.4050 would be the deciding factor between a bullish reversal or continued weakness in the days and weeks ahead. Sure enough, the pair formed a bullish pin bar from this level following Wednesday’s session.
I didn’t announce this as a buying opportunity simply because it was against the grain. The bearish trend that has been in place for almost two years now requires more than a bullish pin bar at support to justify a long position.
I bring this up because I have received several emails asking about GBPUSD. More specifically, many are wondering when might be a good time to sell the pound against the US dollar.
Two factors come to mind when I think about this question; one is technical and the other fundamental.
- The previously mentioned 1.4050 key level. As long as the pair remains above this level on a daily closing basis, the downside will be limited.
- Next week’s BoE rate decision. On Thursday of next week (April 14th) the Bank of England is set to make its latest policy announcement.
While I won’t use the latter as a basis for a trade, it does offer a warning about the possibility of increased volatility during the second half of next week. Nobody expects the bank to move, but as we’ve witnessed so far this year, words are often more impactful than outright action.
All in all, I’m staying neutral here but will continue to respect the reversal potential while GBPUSD trades above the 1.4050 handle. On the other hand, if we see a daily close below this level, a retest of the current 2016 low at 1.3834 could materialize in short order.
Farzin, it’s possible. But I’m doubtful about that scenario playing out seeing as how this pattern didn’t form after an extended move up. GBPUSD was in a similar range prior to this structure forming.