Sterling Caught Between A Rock And A Hard Place
Faraday Research | Nov 23, 2017 12:15AM ET
As my colleague Matt Simpson noted last week, the British pound is caught between a rock and a hard place technically speaking against the US dollar.
Just looking at the price action over the last two months, GBP/USD has been constrained to a tight sideways range between support at about 1.3025 and clear resistance up near 1.3325. More broadly speaking, rates are at a crossroads between two conflicting trend lines.
On its mid-September spike, cable was capped by the long-term bearish trend line off the highs from July 2014, which currently comes in around the 1.3400 handle. Meanwhile, the pair has also been finding support off a consistent bullish trend line since April, with support currently projected in the mid-1.30s. In other words, GBP/USD is coiled tight, like a spring ready to explode.
Though it's lacking the clear trend lines, the situation in EUR/GBP is similar, with rates still consolidating in the middle of their multi-month range between about 0.8750 and .9025:
It's notoriously difficult to handicap the direction of a breakout from a sideways range with much certainty, but one general rule of thumb is to favor the longer-term trend over the shorter-term price action. In this case, that would point toward a potential break lower in GBP/USD and higher in EUR/GBP (GBP weakness).
That said, the more conservative way to trade the current setup, especially for short-term traders, would be to keep a neutral bias until we see prices starting to break out one way or another, then jump on that move once traders have shown us which way they're leaning.
Though far from foolproof, we've found its best to trade what you see, rather than becoming overly attached to a bias in any market.
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