An extension higher in the Asian session led to a test of a critical trendline in GBP/USD. Sellers defended the area which led to a decline to wipe out early day gains. The pair trades in negative territory approaching the end of European trading and a daily candle close near current levels would serve to print a bearish shooting star pattern.
The rally in GBP/USD last week resulted in a bullish engulfing weekly candle as the pair made a decisive turn from a prior downtrend.
The pair extended higher last ahead of the Fed meeting to trigger a bullish break from a declining channel that had held price action lower since the end of February. Following a retest of the pattern, the pair gained upside momentum as the Fed and BoE meetings provided a catalyst for a further recovery.
The pair broke through several notable levels in the past week and is now approaching an area which stands to impact the medium-term directional bias for the pair.
GBP/USD has largely been trading in a range since the October flash crash with support near the 1.2000 handle while rallies have been capped below 1.2800. The range appears to be narrowing with a lower peak in February as compared to prior highs in December. Last week’s low was also ahead of the lows posted following a sharp gap lower in the middle of January.
A catalyst may be required for a clear trend to develop in the pair, and until such a trigger is present, the present range environment is likely to continue.
Resistance in the current range can be seen from the declining trendline that was tested today. Further resistance is seen from a trendline that connects highs from December to February and currently falls near the 1.2600 handle. In the absence of a break, it is likely the pair will remain rangebound, from a broader time frame perspective.
In the near-term, GBP/USD has posted a 4-hour bearish engulfing candle following today’s rejection from trendline resistance. The pair also shows a failed attempt to scale horizontal resistance at 1.2394 which was previous support that held the exchange rate higher in the second half of February.
The first level of support falls at 1.2364 as it held the pair higher in early February. Stronger support at 1.2318 had acted as resistance in October and support in November.
The latest positioning report indicated a build in the net short position among non-commercials of $1.9 billion to $8.1 billion. Combined with a sizeable reduction in the net short euro position in the week to March 14, the Sterling position was the largest net short held among the majors. While positioning is likely to have adjusted appropriately following the broader Fed-inspired dollar decline last week, the British pound remains at risk to the upside considering the size of short positioning.
Next on the economic calendar pertaining to the pair is a speech from Fed Evans. His comments will be important as the Fed may try to readjust market expectations following the sharp drop in the greenback as a result of last week’s meeting. President Trump is due to give a speech after the Wall Street close, at 19:30 EST. There are several releases from the UK on Tuesday at 05:30 EST that stands to move the pair, the highlight will be consumer price index figures for the year ending February.