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Home Markets Forex

GBPUSD Technical Analysis – Is it time to fade sterling strength?

Nathan Batchelor by Nathan Batchelor
14 January 2021
in Forex, Insights
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Photo by Joshua Hoehne.

Photo by Joshua Hoehne.

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The British pound rallied back towards the 1.3700 level against the US dollar earlier this week after Bank of England Governor Bailey noted that the central bank may have a hard time implementing negative interest rates.

Governor Bailey also said that negative rates could be “controversial”. These recent statements have been taken positively by market participants as negative rates appear to be have taken off the table, for now.

Sterling has got-off to a strong start since the beginning of the year and continues to defy bearish news surrounding the United Kingdom economy, and the second UK lockdown, which is expected to last nearly three months.

Rising COVID-19 infections in the UK has so far failed to de-rail the British currencies gains against the US dollar, although it should be noted that incoming stimulus from the Biden administration and rising bond yields could cause a trend change in the GBPUSD pair.

With the GBPUSD pair sitting at multi-years highs it is certainly worth pondering whether now may be the time to fade sterling strength, and indeed whether the GBPUSD pair is overstretched around current trading levels.

Price action can be misleading at times, and this is where technical analysis comes into its own. As long as the GBPUSD pair continues to set new weekly highs they traders are likely to be cautious towards fading current sterling strength.

Traders may need to see a combination of bearish lower lows and lower highs, and a valid breakout in the US dollar index above the 90.00 handle before bears may start to focus on taking sterling into a lower trading range.

GBPUSD Short-Term Technical Analysis

To give traders an outline of the technical picture for the GBPUSD pair I am going to start with what they need to do or change the short-term trend. GBPUSD traders need a series of four-hour candle below the 1.3460 level to shift the short-term technical in favour of the bears.

Lower time frame analysis of the GBPUSD pair shows negative MACD price divergence extending down towards the 1.3570 price area. A major pullback will depend on the gateway 1.3700 level, and if bears can continue to defend this area.

Source by ActivTrader.

Traders looking to fade strength may look for sustained weakness around the 1.3700 level. Selling a breakout below the 1.3600 level is still fraught will danger due to the overall bullishness over the GBPUSD pair.

More conservative traders may wait for a confirmed breakdown towards the 1.3460 level before considering selling the GBPUSD pair.

GBPUSD Medium-Term Technical Analysis

Looking at the daily time chart, the first point to make is that the 1.3660 level is a huge trading pivot for sterling, and a key level to watch around the daily and weekly candles.

Bears currently face the monumental task of needing to sink sterling towards the 1.2860 level in order to change the prevailing trend and move the price under the pairs 200-day moving average.

Source by ActivTrader.

According to the daily time frame the GBPUSD pair could still reach the 1.4000 level as a large bullish reversal pattern is still in play while the price trades above the neckline of the pattern, around the 1.3470 level.

In summary, gains above the 1.3700 level could prompt more gains towards 1.4000, while failure to overcome 1.3700 could see a pullback and a key technical test of 1.3460.

Tags: Andrew BaileyBoECovid-19GBPUSDUS DOLLAR INDEX

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