This currency pair has been falling over the past two days, although the move lower has not been what could be called especially strong. One of the major drivers of this has been a general decline in risk sentiment over the past day as President Trump’s weekend announcement to the effect that a peace deal to end the US/Iran war was imminent has been shown to be obviously false.
The US Dollar has gained as risk sentiment deteriorates, but the British Pound is also playing a role here as worries persist regarding the health of the US economy. Nothing seems above to lift it except strong general risk-on sentiment, which is looking increasingly unlikely to return any time soon. Will this leave the price trending lower?
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US / Iran War May Be Close to Major Developments
President Trump’s announcement last weekend that a peace deal had been all but agreed raised expectations that an end game to the war is finally here. This boosted risk sentiment, but it is now becoming increasingly clear even to President Trump’s allies that his pronouncements of an imminent deal were hollow. This may drive the ongoing standoff to a different kind of resolution, which might trigger more direction in markets, including this currency pair.
President Trump talks about how he is not in a hurry for a deal, but he clearly is, and if a resolution is not reached soon, Congress could assert itself, and even Republican Senators might start breaking with President Trump over this issue. This could lead to a poor no deal outcome, a bad deal, or even a return to war.
Because the Iran situation affects the price of crude oil, which has a big impact upon inflation and risk sentiment, it is the major driver of the US Dollar, which in turn is the major engine of the Forex market.
GBP/USD Technical Analysis
The last few hours saw a bullish impulsive move after two days of a bearish decline which saw the price fall below the $1.3400 area, which earlier in the week I saw as likely to be strong support. However, the bullish move seems to have faltered after the London open after almost testing the new resistance level I have identified at $1.3413. This suggests that the bearish trend of the past few days seems to be remaining intact.
It is hard to understand this morning’s impulsive bullish move beyond buyers seeing a potential bargain after the price fell below $1.3400. The downwards movement is a lot easier to understand, it is the market finding Trump’s earlier optimism over an Iran deal increasingly hard to believe.
The new resistance level at $1.3413 looks likely to be today’s pivotal point. That means that if the price fails to break it, we will see the price turn and fall. If we do get a breakout above that level, then the price will probably rise higher over the day, although $1.3433 could be another obstacle.
If the PCE Price Index data surprises later, it could send the price blowing through technical levels with ease. Until that release, we will likely see low volatility.
Watch Out for a Return to Kinetic War in Iran and the Gulf
Clearly the ceasefire, and by extension the negotiations, have become markedly more fragile. Markets are expecting now that the negotiations will become more difficult and prolonged, but I think markets are still expecting a deal will be concluded that President Trump will present as good for the USA, but which will truly be bad for the USA, at least on President Trump’s real terms. Even market players who are expecting a deal are not expecting a real return to kinetic war.
What if this is over-optimistic? President Trump is the commander in chief, and it seems he is expecting the Iranians to make a deal and give him at least the minimum acceptable victory. I believe he is mistaken. It could be that the penny finally drops in his mind and he decides to strike Iran just when the Iranians are thinking he is too afraid to do it.
A return to all-out war in Iran and the Gulf could be very destructive and send the price of Crude Oil to $200 which would start the US Dollar moving strongly and would probably also see global equities fall sharply. This could blow even longer-term trades out of the water and cause major repositioning.
Do Markets Have It All Priced In Already?
I could be wrong that progress towards an Iran deal is going to be the major factor in where the price goes next. Markets may be better than I expect as seeing past the mechanics of the situation and instead seeing a reality in which neither side in this war can really take things any further towards their advantage. Perhaps decision-makers in Iran are more cognisant of their economic interests than I give them credit for.
My Take on GBP/USD
Most technical analysts will look at the price chart and see a weakly bearish situation where a short trade from $1.3413 will look like the most attractive potential set up for today. It is hard to see a real bullish case above $1.3413 as there are a few resistance levels packed together in that area and lots of recent price action, but there is plenty of room below $1.3413. The line of least resistance is certainly downwards.
Review, Support & Resistance Levels
My previous GBP/USD signal on 26th May produced a profitable short trade from $1.3489.
Risk 0.75%.
Trades must be taken before 5pm London time today.
Long Trade Ideas
Long entry following a bullish price action reversal on the H1 timeframe immediately upon the next touch of $1.3347 or $1.3300.
Put the stop loss 1 pip below the local swing low.
Adjust the stop loss to break even once the trade is 25 pips in profit.
Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to run.
Short Trade Ideas
Short entry following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.3413, $1.3434, or $1.3463.
Put the stop loss 1 pip above the local swing high.
Adjust the stop loss to break even once the trade is 25 pips in profit.
Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
The best method to identify a classic “price action reversal” is for an hourly candle to close, such as a pin bar, a doji, an outside or even just an engulfing candle with a higher close. You can exploit these levels or zones by watching the price action that occurs at the given levels.
There is nothing of high importance scheduled today concerning the British Pound. Regarding the US Dollar, there will be releases of PCE Price Index and Advance GDP data at 1:30pm London time.
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