Chapter 43  09/15 GBPUSD: Showdown of Left and Right Shoulders Nearing Its End - Is a Reversal on the Horizon?

Summary: During the Asian and European sessions on Friday, the British Pound surged to around 1.2440 against the US Dollar, breaking free from multi-month lows. Several factors contributed to some profit-taking in the US Dollar, offering support to the asset. Meanwhile, the likelihood of further interest rate hikes by the Bank of England continues to diminish, potentially dampening the recovery momentum. However...


The US Dollar continued its upward trend following the European Central Bank's rate hike, with a slight increase in two-year US Treasury yields. Positive economic data released by the US, including retail sales well above expectations and rising PPI, along with lower-than-expected initial jobless claims, indicate that the US economy remains robust and can still withstand further rate hikes by the Fed.

The US Dollar is expected to remain relatively strong in the lead-up to the Fed meeting next week. While the likelihood of a rate hike in September is low, the dot plot could have a significant impact on the market, as the August inflation rebound may prevent a significant dovish revision by Fed officials for the 2023 dot plot. Additionally, evidence of economic resilience since the last economic projections in June suggests that the 2024 dot plot may be revised higher. All of this suggests that the US Dollar is unlikely to experience a significant decline in the near term unless US economic activity data starts to disappoint.

On the British Pound front, as investors begin to digest the upside risks of a global economic slowdown, the US Dollar saw some profit-taking on Friday, prompting the Pound to attempt a recovery. However, the lack of fundamental support makes the overall recovery challenging.

The UK economy contracted in July due to persistent high inflation, which eroded household wealth and led to a significant decline in service sector output. Meanwhile, wage growth remains strong, and inflation risks remain skewed to the upside. The Bank of England's tightening interest rate policy has dampened labor demand prospects and exposed the economy to a potential recession.

As investors turn their attention to the Consumer Price Index for August, to be released next Wednesday, the Pound is expected to experience volatility. Following the inflation data release, the Bank of England will announce its rate decision next Friday, and forward guidance could continue to pose further downside risks to the asset.

However, the downside potential for the asset now appears to be nearing its conclusion.

From a technical chart analysis of the GBPUSD, the sharp decline that began in early August was a result of a head and shoulders top formation created as the right shoulder was lower than the left shoulder formed on June 16th. Breaking below previous support on August 24th without a rapid reversal as seen on January 6th and March 11th intensified the downward momentum for the asset.

Now, as the price approaches and nears the support zone from May, will the bulls witness an equally sharp rebound? We believe that if the market proves the May support zone to be sufficiently strong to halt the current decline, an equally sharp rebound may create another right shoulder formation, though with minimal stop loss.

09/15 GBPUSD: Showdown of Left and Right Shoulders Nearing Its End - Is a Reversal on the Horizon?-Pic no.1

Technical Analysis

From a technical perspective, the GBPUSD breaking below and closing below the crucial 200-day SMA for the first time since March overnight is seen as a new trigger for bearish trading. Furthermore, the oscillators in the daily chart remain deeply in negative territory, with a considerable distance from the oversold region. This, in turn, suggests that the path of least resistance for the GBPUSD pair continues to be downward. Breaking below the overnight lows may accelerate the decline toward the May monthly range of 1.2310-1.2350, nearing the next relevant support area around 1.2280-1.2275.

On the other hand, any subsequent upside moves could gain momentum within the 1.2310-1.2350 range. Subsequently, it could trigger short-covering and push spot prices toward the psychological level of 1.2500. The recovery momentum may potentially continue higher after an adjustment, forming the aforementioned equally substantial rebound. If not, the setup could fail. In terms of trading strategy, buying the dips is recommended as the primary approach.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.2355

Target Price: 1.2702

Stop Loss: 1.2268

Valid Until: 2023-09-29 23:55:00

Support: 1.2370, 1.2307, 1.2275

Resistance: 1.2447, 1.2505, 1.2548

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