Bounce-or-Break Scenario in Play
by Bogdan Giulvezan
Although the United Kingdom has been severely affected by the pandemic, the Pound has been a constant climber over the last few months, outpacing the US Dollar and now threatening the resistance at 1.3900.
The pair has been stuck in a rising channel since mid-September 2020 and thus far, it has been following the said pattern almost “to the letter”. Both the upper and lower boundaries of the channel have been rejecting price, which means the pattern was very profitable for those who followed it since the early days of its forming.
As far as COVID-19 vaccination goes, the pace seems to be picking up in the UK, and the number of new cases has subsided, which may prove to be a catalyst for continued Pound strength. However, the week ahead will reveal important economic data for both the Pound and the US Dollar, thus the pair will be affected by fundamental factors, as well as technical.
Key Events for the Week Ahead
Today US banks will be closed in observance of Presidents’ Day, so there will be no data coming out for the greenback. Similarly, the Pound has a slow day as far as economic data releases. The action picks up Wednesday, February 17 with the release of the British Consumer Price Index, scheduled at 7:00 am GMT. The indicator tracks changes in the price of a basket of goods and services and acts as a gauge of inflation. The expected change is 0.5% (previous 0.6%) and higher values are usually beneficial for the Pound.
Later in the day, at 1:30 pm GMT, the US Retail Sales come out and the expected change is 1.1%, a hefty increase from last month’s -0.7%. Since sales made at retail levels represent a major part of the entire economic activity, higher numbers usually strengthen the currency.
Friday, February 19 it’s UK’s turn to release Retail Sales data. The indicator comes out at 7:00 am GMT and the forecast is -2.6%, a big drop from last month’s 0.3%. Depending on the actual number, this could be a catalyst for strong moves, thus caution is recommended.
Chart Analysis – GBP/USD
The pair has been confined inside the rising channel since bouncing at 1.2690 support, back in September 2020 and now it is approaching the upper boundary, which is in close vicinity of 1.3900 resistance.
Given the extended move up and the way price has been behaving, it is possible to see a descent after another bounce off the upper boundary. If this scenario comes true, the first notable support is located at 1.3700, which is strengthened by the 50 periods Moving Average and of course, by the lower boundary of the channel. If this strong support zone is broken, it would suggest a shift in the balance of power in favor of the bears, thus we will likely see lower prices during the days/weeks following this potential break.