GBP/USD: On Robust Support; Possible Recovery Short-Term

Despite better-than-expected UK Retail Sales, GBP has lost ground, partly from the threat of Brexit; now it has reached support, however, and there is a chance of short-term recovery taking shape.

Despite November’s laudable UK Retail Sales results, which smashed expectations, cable actually fell back down to 1.4890s

The surge in UK Retail Sales was largely attributed to Black Friday sales and pre-Christmas shopping.

Although, momentarily GBP/USD shot up to a high of 1.50, it failed to hold onto these highs and momentum eventually folded, bringing the pair back back down.

It is thought ongoing Brexit fears were a contributing factor to sterling weakness, as speculation was heightened by polls showing a rise in pro-exit sentiment.

It is thought that uncertainty over EU membership is something that could delay an interest rate rise at the Bank of England, further weakening sterling.

GBP/USD Has Sold Off, Testing Key Levels

Looking ahead, Commerzbank's technical strategy team note suggests:

“GBP/USD has again sold off and is now testing key support at the 1.4897/60 recent low and Fibonacci retracement, we would allow these to hold the initial test.

“Support at 1.4860 is regarded as the last defence for the 1.4577 April low and this is now our target.

“Currently intraday Elliott counts suggesting that rallies are likely to remain capped by 1.4990 – for now we will take profit on our shorts.

“Key short term resistance is the 1.5273 resistance line and the 200-day ma at 1.5323.

“[Our current trade is] short 1.5090. Recommended trade [is] cover at market.”

Wedge patter could signal recovery short-term

The pair may have fallen to tough support at the base of the falling wedge pattern it has formed on the daily chart (see below). 

The support cluster is made up of the S1 Monthly Pivot and the lower border-line of the wedge.

There is quite a high probability that the pair will now bounce off this support level and start to move higher, eventually trading back up to above 1.5000 and the upper border of the descending wedge.

The RSI indicator is not showing the pair is oversold, however, it is showing mild bullish convergence at the present lows, lending a little support to the argument the pair will rally back up again from its current position.

A rise for sterling against the dollar would also fall in line with seasonal expectations of stocks rallying in the week immediately prior to Christmas – and therefore likely weakness in the dollar which is inversely correlated to stocks.

For confirmation of more upside I would ideally wish to see a move above 1.5011, which would probably lead to a rise to at least 1.5075 - or even the upper border of the wedge at about 1.5100. 

Falling wedges presage more upside eventually, and it is likely that the pair will eventually break out of the pattern and move higher – probably in a powerful surge higher.