Sterling Retraces after Testing Major Resistance

Devata Tseng FxPro

Sterling hit a 2-week high of 1.3210 on Tuesday 23rd, from the low of 1.3033 on 22nd Aug, a 1.36% rise. Yet it pulled back as 1.3200 is a major resistance level. It rebounded this morning after tested the support level at 1.3160.

The US New Home Sales for Jul released on Tuesday 23nd Aug, rose to 654,000, reached the highest level since Oct 2007. New Home Sales Change surged to 12.4%, beating expectations of -2.0%, and the previous figure of 1.7%. The dollar strengthened after the figures released, as a result, weighed on GBP/USD.

The rally of Sterling from 22nd to 23rd Aug had the appearance of a short squeeze. According to the data released by the US Commodity Futures and Trading Commission, the short positions in Sterling have increased every week since the Brexit vote, reaching a record high in the week to 16th Aug.

The Brexit may not be egregious in the long term, yet it will be a painful process in the following year before reaching a new deal with the EU. The uncertainty will also be reflected on the trend of Sterling.
The UK has a large current account deficit, requires consistent and plentiful foreign investments to balance it. Yet the consequence of the Brexit vote may lead to a decrease in foreign investments.

Although the first set of post-referendum data released last week was better-than-expected, more subsequent economic data is needed to have a clearer picture of the Brexit impact on the UK economy.
It is better to keep a cautious stance when trading Sterling as the uncertain political and business climate may last for a long term. Whenever Sterling is trading at a high level, it may trigger short positions. 1.3200 is a major resistance. In addition, the daily time frame KD indicator is above 80, suggesting a pullback.

Keep an eye on the US Existing Home Sales figures (MoM) for July, to be released at 15:00 GMT+1 on Wed 24th Aug. With positive readings, the dollar will likely keep on rebounding. And weigh on GBPUSD, test the support at 1.3160 again, followed by 1.3150 and 1.3130. While lower-than-expected figures, GBPUSD will likely bounce and test the resistance at 1.3190 followed by 1.3200.

Author

Devata Tseng

FxPro

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