GBPUSD – Dollar Weakness Spurs Cable Correction

Broad-based weakness in the dollar on Tuesday has created an opportunity for cable to pare recent losses following the break of the ascending trend line a couple of weeks ago.

I highlighted in previous pieces that 1.5170-1.5220 may prove to be a key support region due to the cluster of support here (previous support and resistance, 50 fib level – 13 April lows to 14 May highs – and 89-day simple moving average). The bottom of the descending channel that is was trading in was broken briefly but this turned out to be a false breakout and we’ve since seen a strong push higher.

If the pair can hold onto these gains for the rest of the session and the daily candle close above yesterday’s opening level, it would create something that resembles a bullish engulfing pattern and a tweezer bottom, both of which are bullish.

We may see it pare some of these gains tomorrow, at which point I’ll be paying close attention to the midpoint of today’s real body to offer support and potentially confirm the bullish reversal.

It’s worth saying at this stage that I still believe this is a short term bullish move and in the longer term I remain bearish. Going forward I think 1.5450-1.55 offers a very interesting resistance area. Firstly, these have previously been key levels of support and resistance.

Moreover, 1.55 is the 50% retracement of the move from 14 May highs to yesterday’s lows. It could also coincide with the top of the descending channel depending on how long the move takes and the 89-period SMA on the 4-hour chart. Finally, if the pair fails to break above here, it could lead to a potentially very bearish head and shoulders formation.

If the pair breaks beyond here it wouldn’t necessarily mean the pair is therefore bullish. It is still holding below the 233-day SMA which the pair failed to break back above in the middle of May. This tells me the long term trend remains to the downside and unless we see a break above 1.5780-1.5870, I will find it very difficult to be long term bullish.

Forex Open Position Ratio

Historical Position Ratio

*The above tools and many others can be found in OANDA Forex Labs.

As you can see, OANDA clients net position has followed price action quite well as of late. Today the net position is only marginally short, which suggests we’re seeing some short covering/long positions being executed as price rallies. It will be interesting to see if this continues or the recent bearish bias returns.

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