We have reached what is obviously an interesting moment in general for the Forex market and particularly for this currency pair, as GBP/USD ascends to near the top of its two-month range before making a clear break with the short-term trend and starting to move lower in an orderly way. This is coinciding with two other potentially pivotal events which will certainly inject more volatility into the markets, and which might produce more decisive directional movement in the US Dollar. Which way will it be?
The events in question are the de facto resumption of the USA/Iran war and the release today of US CPI (inflation) data. Both have the potential to strengthen the US Dollar, and one (the inflation data) has the potential to weaken it. As the GBP/USD currency pair is now falling from the top of its multi-month range, or at least from a high close to it, there is downside potential, and we have two things going on which could put a bid into the US Dollar and give a tailwind to short traders in this currency pair.
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The US CPI data is very carefully watched by the Fed, but another indicator they keep close track of is the US PPI, which will be released tomorrow, making this week even more potentially important.
GBP/USD Rejecting a Pivotal Zone Near Recent Highs?
The price chart below shows that for several days, the price was moving higher in an orderly way within an ascending linear regression analysis, which can be seen rising from the bottom left of the chart. This trend broke at the end of last week, and we can now see a short-term downwards trend has been established within a narrower descending linear regression analysis.
This bearish turn comes near the effective high and resistance area at about $1.3500, so the longer-term charts suggest there is plenty of room to fall.
It is worth noting that the downwards move of the past couple of days trading time looks, if anything, less volatile than the preceding upwards move, and this probably indicates that the market is really not sure about this move down – it does not look impulsive. This is not a surprise as we have fundamental data and geopolitical events coming over the next 36 hours which can completely override the technicals and render them at least temporarily irrelevant.
US Data and Strait of Hormuz Disruptive Potential
With two major US Dollar data releases due over the next two days, and an escalation in the Middle East which could cause major problems for the global economy via the price of crude oil and some other commodities, there is a lot of unpredictability. The risk in these situations is that something blows up unexpectedly and for a few hours at least technical analysis will not help much, while breakouts or breakdowns will be less likely to be decisive.
All traders, especially day traders, should keep this in mind.
Support & Resistance Levels
My previous GBP/USD signal on 9th July had me looking to buy the dip, which would have worked out well during the New York session that day.
Risk 0.75%.
Trades may only be entered prior to 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 $1.3402, $1.3379, or $1.3202.
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 Idea
Short entry following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.3489 / $1.3500.
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.
How Traders Might Frame Opportunities Today
I think that what might happen today with the US CPI inflation data means that it could be wise to avoid putting any new trades on until that data has been released and then reacting accordingly. As we are at the top of a 2-month range, as long as the price remains below $1.3500, I see the main opportunity as to the downside. So, a post-data release rejection of any of the resistance levels shown could be a great short trade entry signal.
If the price breaks out above $1.3500 if the US CPI is notably high, and retests $1.3500 from above and it holds, that could be a really great long trade entry signal.
There is nothing of high importance scheduled today concerning the British Pound. Regarding the US Dollar, there will be a release of CPI data at 7pm London time.
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