Key Points:
- Wedge structure remains in place this week.
- EMA bias firmly bearish despite recent surges in buying pressure.
- MACD crossover signalling that the downtrend is about to resume.
Downside risks remain in place for the Cable moving ahead and the pair is currently on course to test the lower boundary of its consolidation structure. Specifically, recent price action seems to have confirmed the overall bearish wedge pattern and, as a result, we could see a slide back below the 1.20 handle within a few sessions.
Taking a closer look at the wedge pattern, the structure seems fairly robust and has had both the upside and downside constraints tested at least twice each over the past number of weeks. As a result, we expect to see the pattern remain intact for a little while longer yet, especially given that it withstood the fallout from Theresa May’s Brexit remarks.
However, due to the prior session’s swing back to the greenback, the GBPUSD is in fairly neutral territory which leaves both some upside and downside potential on offer. Exactly which constraint of the wedge will now be tested is far from clear but there are a number of factors intimating that losses should extend as the week winds down.
Firstly, the daily EMA retains its persistently bearish bias which will no doubt be limiting the willingness of the bulls to wade back into the fray and also encouraging further selling pressure. Indeed, it seems that the only reason that yesterday’s tumble didn’t entirely erase the rally following Theresa May’s speech was the unexpected fall in the UK Claimant Count of around 10.1K.
Secondly, if we look at a shorter time frame chart it becomes apparent that the MACD oscillator is very much indicative of further slides lower. Whilst not shown, the H4 chart’s MACD is currently in the process of completing a signal line crossover which would shift the reading’s bias from bullish to bearish.
Combined with the overall pessimism surrounding the Cable, a retracement back to around or below the 1.20 handle seems to be the most likely outcome for the embattled pair. However, we do still expect the lower constraint of the wedge to hold and, therefore, we are also likely to encounter a reversal as the pair challenges the integrity of the structure.
Ultimately, there will be some headline risk coming down the line due to the Trump inauguration and this could provide a near-term boost to the pair. As a result, it will pay to have half an eye on the proceedings as well as the more traditional economic indicator releases. However, any near-term uptick in buying pressure should be short-lived as it will take a major fundamental shift to buck the Cable’s long-term bias.