Could GBPUSD Be Forming a Bottom?

Just a few month ago, on the unfathomably unpredictable planet we call Earth, traders were arguing whether the Federal Reserve or Bank of England (or both!) would raise interest rates this year. Flashing forward to the present day on the same erratic planet, and some traders have already started to ponder whether both the Fed and BOE could hold off on raising interest rates until early 2016!

In the week’s marquee economic event, the Fed will release its latest statement on the economy tomorrow and the central bank appears likely to strike the same dovish tone as it has in recent statements (stay tuned to FOREX.com for our full coverage of the event tomorrow). As Fed Chairwoman Janet Yellen incessantly reminds us, monetary policy is always data-dependent, and the data out of both the US and UK has been lackluster of late. Over the past few months, the UK’s economy has deteriorated more rapidly than the US economy, so GBPUSD has trended persistently lower. However, the chart is showing nascent signs of turning higher, and tomorrow’s Fed meeting could serve as a catalyst for a rally in cable.

Technical View: GBPUSD

As we noted above, GBPUSD has been in a clear downtrend since peaking near 1.7200 back in July. After moving generally sideways for the past couple of weeks, the pair peeked out above its descending trend line to trade up to 1.6200 earlier today, though the break has not been confirmed by a close above the trend line yet.

Beyond the bearish trend line, the 1.6200 level also represents the 50% Fibonacci retracement of the Sept-Oct drop as well as the neckline to an inverted head-and-shoulder pattern. For the uninitiated, this classic price action pattern shows a shift from a downtrend (lower lows and lower highs) to an uptrend (higher highs and higher lows) and is typically seen at major bottoms in the chart. If rates manage to break conclusively above the neckline, a more sustained rally would be favored.

The secondary indicators are also looking relatively constructive. Both the MACD and RSI have turned higher after bullish divergences in recent weeks, showing declining bearish momentum and hinting at a potential turn higher.

At this point, the longer-term bearish trend is still intact, but it’s always important for traders to consider when a trend is vulnerable to reverse. If we do see a daily close above critical resistance at 1.6200, a more substantial bounce toward 1.6276 (the 61.8% Fibonacci retracement), 1.6385 (the 78.6% Fibo) or 1.6530 (the measured move target of the inverted H&S pattern) may come into play next month. On the other hand, a drop back below 1.60 would suggest that the longer-term downtrend has resumed for a possible retest of the 1-year low under 1.5900.

Source: FOREX.com