GBP/USD - Bullish outside day candle validates rally, but Vols remain high

GBP/USD rallied to a high of 1.3291 on Thursday after reports hit the wires that the EU is ready to do its bit in helping the UK avoid 'Hard Brexit'.

Bullish outside day candle

The daily chart shows a massive bullish outside day candle. It engulfs price action see over the last two days and hence indicates the rally from the Oct 6 low of 1.3027 is likely to continue in the short-term. Also signalling further gains is the bullish 5-day moving average and 10-day moving average.

However, the one-month ATM options volatility remains at the elevated levels despite the sharp recovery from 1.3027.

The chart above shows-

  • 1-month ATM volatility (green line) holds near the recent high of 8.7
  • 1-month realized volatility (magenta), also known as the historical volatility, seems to have topped out

The elevated ATM Vol (implied vol) indicates the market expects GBP/USD volatility to remain high, which makes sense given the Brexit related uncertainty.

Usually higher implied volatility also indicates the market is bearish. Thus,GBP bulls need to be cautious as  high volatility contradicts the message delivered by the bullish continuation pattern (bullish outside day candle).

Looking ahead - A better-than-expected US retail sales and CPI number could strengthen the bid tone around the US dollar.

GBP/USD Technical Outlook

Kathy Lien from BK Asset Management writes, "now that the August high of 1.3269 has been broken, the next key resistance level for GBP/USD is the 20-day SMA near 1.3350."

FXStreet Chief Analyst Valeria Bednarik mentions critical support and resistance levels -

Support levels: 1.3260 1.3220 1.3180

Resistance levels: 1.3290 1.3330 1.3365

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