Can Sterling Keep It Together?

faithmight

I am coming across some really interesting analysis on the Sterling Index.  As sterling traders, this index should become as important as the $USDX is to commodities traders. Last week, Michael Hewson’s article titled “Sterling hit by public finance figures” discussed a head and shoulders (H&S) formation on a LT chart of the Sterling Index. Instead of price dropping as the H&S suggested, sterling got the boost that Hewson warned of when UK 2Q GDP came in much higher than expected at 1.1%. Today nearly a week later, the Sterling Index was discussed on All Things Forex. From this radio show, I learned that,

“historically, the Sterling Index trades in a range –  a range that has been respected for 30 years. Right now, sterling is trading [near] those range highs.”

Given the surprising economic releases out of the UK and an overall neutral-sounding MPC , sterling has found fundamental reasons to continue to rally. Technically, however, the sterling may be due for a bit of a correction.

GBPUSD hourly chart July 28 2010

Given these clues of price exhaustion from the Sterling Index, the $GBPUSD breakout rally may also be showing signs of exhaustion. Though price rallied to a high of 1.5637 yesterday, cable actually corrected below the 61.8% Fibonacci level on Wednesday’s bullish price move. The high of the day found enough resistance at 1.5635, the 100SMA on the weekly. A break of this level will be a sign of strength. A break below 1.5540 will be a sign of weakness that could see price return to 1.5500. Lastly, when it comes to a rally-turned-breakout like this one, time becomes a good indicator of continued price action. Raghee discussed time nicely on ForexEDU this week. This $GBPUSD rally has lasted 5 consecutive trading sessions and has moved 500 pips in that time. It has broke through many key levels on the ST and MT charts. Consequently, current price action is coming against some key levels on those charts as well.

On the $EURGBP, price sits near major ST support at 0.8310/15 that I noted here at the start of trade this week. Price can either bounce from here as they did on Monday or break below and  target MT support at 0.8274.

In all honesty, I don’t know what sterling is going to do. But given its recent price action across all these different charts, price exhaustion and subsequent pullback is becoming more and more likely. How long that correction lasts will be up to the market. But the GBPUSD daily and EURGBP daily charts may have some answers. Trade what you see!

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