GBP/USD is at a 6-day high following the release of U.K. unemployment data. The pair is currently up 0.04% over Tuesday’s N.Y. close and continues to test first resistance at the 1.2325 level with a move to 1.2333 for a high in today’s trading. The pair is holding onto the gains posted in Tuesday’s session in reaction to headlines, noting that a U.K. government lawyer stated that U.K. parliament will “very likely” have to ratify agreement with EU when the country exits the bloc. And that EU and Britain could agree that any deal would come into effect without parliamentary approval.
Today’s unemployment report has helped maintain a bid in the pair. The data was, overall, slightly stronger than expected. The UK claimant count of unemployed workers recorded an increase of 700 for September, which was lower than the expected increase of 3,500, although there was a significant upward revision to the August figure to 7,100 from the 2,400 reported originally. The unemployment rate held steady at 4.9% compared with a figure of 5.5% in September 2015. The headline increase in average earnings was in line with expectations at 2.3% from an upwardly-revised 2.4% the previous month, while the underlying increase in earnings, excluding bonuses was also at 2.3% from 2.1% previously. The data suggests no significant damage to the labor market in the wake of the Brexit vote.
As a result of the recent move higher, first resistance at 1.2325, the high of the mediocre rebound attempt following the establishment of the October 11th closing low, is in play. A sustained break above this level is required to turn the short term trend in the pair higher. On such a move, the next resistance is at 1.2470, defining resistance shown on the 4-hour chart and, above this level, 1.2517 is the next potential resistance, as it represents a 38.2% retracement of the decline from the early September high. The pair is currently testing the 23.6% retracement level. Key resistance does not come into play until the 1.28 level. The gains in the pair have helped ease what became an extreme oversold condition. Therefore, the onus is on the bulls to carry the pair higher, now that oversold conditions are no longer a factor.
Short covering could be the driving force behind the recent move higher. The latest Commitment of Traders report indicated that large speculators were net short 94,570 British Pound contracts as of the October 11th close, down only modestly from the previous week’s record high net short positioning of 97,572 contracts. The next Commitment of Traders report is due out Friday, with data as of yesterday’s close.
Should short covering ease and the current rally fail, the downside target becomes the 1.22 handle. Below this level, support identified on the daily chart at 1.2115/1.2089 zone becomes in focus, followed by the low of the October 7th flash crash at 1.1950. This level is given added reinforcement by the psychologically important 1.20 handle. Below this area, support in the pair is lacking. With the longer term trend down and a lack of support other than the recent established lows, the coming months have the potential to be rough for the pair, suggesting rally attempts appear best used as selling opportunities until signs of a sustained bottom begin to emerge. At present, no such signs are present, as recent price action appears to represent a bear flag pattern. A downside break from the flag would suggest GBP/USD is vulnerable to another swift move to the downside that takes out the low of this month’s flash crash.