GBP/USD upward trend still intact, but bulls need to show presence pretty soon

About a month ago now, we took a long-term view on the GBP/USD and suggested that there could be significant gains on the way for the currency pair. At the time, the Cable had just breached 1.7040/5 which was previously a significant resistance level and also the 2009 high. From there, it went up by another 150 pips before the rally exhausted around 1.7190. As can be seen on the daily chart, this 1.7190 level ties in with the 161.8% Fibonacci extension of the corrective move we saw during May. Because of that, I believe that the recent weakness is caused mainly by profit-taking from the longs as opposed to any real selling pressure. As a result, the upward trend may still be intact and we could after all see a major leg higher over the coming weeks and months. However, the bulls will need to show their presence soon, for if they don’t further support levels may get broken which would undoubtedly encourage the bears.

Interesting, the GBP/USD is today testing the 1.7040/5 level again, this time as support. Although we haven’t seen any major reaction here so far, this could change as we head into the second half of the week when we have important data releases scheduled from the UK. As such, it is possible we may see some more weakness in the very near-term before a potential rally back towards 1.7190 and beyond. At 1.7000, the next key support level is not too far away anyway. As well as this being a psychologically-important level, it is where we also have the 38.2% Fibonacci retracement of the upswing from the May low. A potential break below there however could expose the 1.6920/50 area for a test. This is where previous support meets the 50-day SMA and the 50% retracement level. Even if the Cable were to reach 1.6920/50, the long-term bullish trend would still be intact and would remain so unless 1.6730 is taken out on a monthly closing basis (see the monthly chart, below).

Figure 1:

Source: FOREX.com.

As before, the key Fibonacci-based resistance area remains at 1.7330/55. Here, the 50% retracement level of the bear move we saw during the Great Financial Crisis ties in with the 161.8% extension level of the corrective move of 2013. Beyond 1.7330/55 there are no obvious resistance levels apart from psychological milestones such as 1.7500. We will of course revisit the long-term chart of the Cable if and when we get there. But in the near-term, what happens next depends on price action around 1.7040 and this week’s data releases:

From a fundamental point of view, the GBP/USD could find some support if there are any hawkish remarks printed in the Bank of England’s last meeting minutes, scheduled for release Wednesday morning. On Thursday, we will have UK retail sales, which are expected have risen 0.2% in June after dropping 0.5% in May. Then on Friday, we will have the preliminary estimate for the second quarter UK GDP. The economy is expected to have grown 0.8% between April and June just like it did in the first three months of the year. Meanwhile from the US, we have already seen a gauge of inflation come in weaker today, namely core CPI which rose 0.1% in June versus 0.3% expected. But existing home sales was better and that overshadowed the inflation figure. The new home sales estimate is due for release on Thursday, along with weekly unemployment claims and the latest manufacturing PMI. Friday’s key US data is the durable goods orders for the month of June.

Figure 2:

Source: FOREX.com.