Bearish Continuation Signal: The GBP/USD is signaling bearish continuation with a break below a consolidation low and the previous low on the year around 1.5585. It is starting this week with a new low at about 1.5540. As we got into the 12/8 European session, price pulled back as we can see in the 4H chart.
Pullback: The 4H candle rebounding from 1.5541 is relatively sharp and we can expect some near-term rally during the rest of the 12/8 session. However, with a fresh low on the year, GBP/USD is likely in a bearish continuation mode, so this rally might be faded as it tests the just-broken consolidation.
Bearish Confirmation: If the market is to remain bearish price should probably hold under the 1.5675-1.5680 area, where the 100-, and 50-period SMAs reside, and where a falling speedline will present resistance. The RSI should also hold below 60.
Consolidation/Correction Scenario: A break above 1.57 however would likely put cable back into consolidation mode, with a possible bullish correction outlook because the current bearish breakout would be assessed as a false-breakout.
Trade Assessment: Now, let’s say we get a trade plan to short at 1.5670, with a stop above 1.57, let’s say 1.5720, giving us a 50-pip risk at stop-loss. The first target would be the 1.5550 area, which is 120 pips and gives us a slightly better than 2:1 reward to risk ratio. Since a bearish continuation outlook suggests price might break below 1.5540, the potential reward is higher, perhaps to 1.55 (170 pips), giving us a slightly better than 3:1 reward to risk ratio for the aggressive outlook.
Lack of Fundamental Factors: After last week’s BoE meeting, the GBP has a lack of fundamental factors this week. The manufacturing production data in the upcoming European session (12/9) could introduce some volatility, but because it is not so timely (for October) it should not have much impact on GBP/USD’s direction this week.
UK Manufacturing Production m/m (October)
(click to enlarge; source: forexfactory.com)
The technical levels of 1.5680 (SMA cluster and falling speedline), and the 1.57 handle, will be key in determining whether GBP/USD is still bearish after last week’s bearish breakout.
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