GBPUSD appears to be trading in a bullish impulse wave after making lows in July. The extended wave-3 of the 5-wave impulse reached a high of around 1.6260 on the first of October and today’s high falls short of the October high by just a few pips. This suggests one of two scenarios:
- If GBPUSD fails to extend above the top of wave-3 and falls below the bottom of wave-4, then the 5th wave is truncated and points to the potential for a sharp correction to the downside.
- If the bottom of wave-4 holds as support, the wave-5 is likely to extend beyond the top of wave-3 before correcting.
The bottom of wave-4 is around the 23.6% Fibonacci retracement of the impulse and was channel support at the time GBPUSD turned higher to begin wave-5. More immediate support may be found around the 1.6075/90 area which is where the daily Tenkan and Kijun lines converge with the 21-day simple moving average (SMA). If the pair falls through this support, the 23.6% Fibonacci level comes into view.
A rebound brings into focus the 1.6260 zone, which is a key hurdle to the upside for GBPUSD as it appears to have formed a double top in the area. Additionally, the daily RSI is faced with a falling resistance line and the indicator was recently rejected from the trend line, a signal that a move higher may be challenging for GBPUSD. Despite signals of potential weakness, we maintain a bullish bias in GBPUSD while the pair trades within the bullish channel and while central bank policy remains supportive ( see BOE minutes: GBPUSD could be picked up on the dips).
Source: eSignal and FOREX.com
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