GBP/USD: Looking At A Potential Wedge Pattern

In line with what has been noticed in the past few weeks, the Cable continued to struggle to find any direction last week and alternated between a bullish and bearish sentiment. The pair even recorded a new yearly low (1.5874) following the news that annualised inflation for September was 1.2%, way below the Bank of England’s (BoE) 2% threshold target before they will consider a rate increase. However, the pair then encountered a complete reversal on Wednesday afternoon when the US markets experienced a sell-off. Comments from James Bullard, renowned to be the most hawkish member of the Federal Reserve, on Thursday evening that the Fed might consider continuing Quantitative Easing (QE) led to the pair reversing all of its previous losses.

Volatility for this pair is likely to intensify on Wednesday next week with two crucial economic releases scheduled to be announced. GBP bulls will be hoping the BoE Minutes release will show that a third member of the Monetary Policy Committee (MPC) voted for a UK rate rise in October. Later in the afternoon, the United States inflation data for September is released. The recent FOMC Minutes suggested there is concern among the Fed that the higher valued USD would be detrimental to US inflation targets. If there is an unexpected slowdown in inflation, confidence in the Greenback will weaken quickly and as such, the GBP/USD could continue its reversal.

From a technical standpoint on the Daily timeframe, the pair is clearly experiencing a downtrend but appears to have pulled away from the bearish channel it previously found itself within. Instead, the GBP/USD has formed some sort of wedge pattern, which can lead to an upside rally later on. Before traders get carried away and see this wedge pattern as a “buy now” opportunity, it must be pointed out that this pair still have plenty of room to move both on the upside and downside, before a potential breakout.

If the Federal Reserve unexpectedly decides to continue with another round of QE later this month, this would encourage substantial USD weakness. As such, we could be looking at the right fundamental opportunity to exploit the technical advantage of the wedge pattern. At the same time, if the Fed conclude QE as planned and continue moving towards normalizing monetary policy, the pair can also move to the downside as well.

If the pair continues to move to the upside, resistance can be found at 1.6152 and 1.6225. If the pair moves in a bearish direction, support can be found at 1.650 and 1.6007.


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