GBPUSD
The Thanksgiving week started with the GBPUSD correcting from the highs. Gold broke horizontal support yesterday, and the move generated a higher USD across the board.
However, it turned out it was only a false breakout. While the price of gold did not recover, traders sold the USD in response to the strong performance from the US equities. As such, all the USD pairs reacted in a similar fashion. The AUDUSD pair trades now well above the 0.73 level, the GBPUSD is back threatening 1.34, and the EURUSD recovered the entire one hundred pips move lower from yesterday.
And all because of the US equities’ strong performance. But this is not something new, especially during Thanksgiving week. This week is characterized by little or no changes in the overall trends. Because so far, the name of the game during the pandemic was higher equities and a lower USD, the chances are very slim that the trend will reverse this week.
Nevertheless, we cannot ignore some technical patterns suggesting the opposite. Both bulls and bears have something to trade on this price action, with the focus shifting on some not-to-distant levels.
Yesterday’s PMI data in the UK showed a mixed picture. On the one hand, the manufacturing data showed resilience. The sector expanded, and the survey reached a value of 55.2 on 50.5 expected and on 53.7 previously. While the manufacturing sector is not as important as the services sector when it comes to the country’s GDP, it still bodes well when interpreting the overall economy.
However, the cold shower came from the services sector – it contracted, reaching 45.8 from 51.4 previously. Still, the 45.8 level was a tad better than the expected 43.2, and so the GBPUSD pair somehow fared well during the release. Also, the weaker services data was pretty much “baked in”. After all, the UK is in lockdown mode, and most services are closed during the period.
Goldman Sachs just announced today that it has applied for a license to open a trading venue in Paris. In an operation called Sigma x Europe, Goldman follows other big players in their move to switch operations from the City to continental Europe.
With only a bit more than a month until the end of the transition period, the GBP should be under pressure with no deal in sight yet. However, it continues to trade with a bid tone, especially against the USD. Because this is Thanksgiving week, the expectations are that the bullish trend will continue as the GBPUSD will squeeze shorts the more we get closer to the end of the trading week.
The technical picture shows the GBPUSD marching towards a new marginal high. Considering the short trading week and the lack of significant economic releases, the chances are that it will manage to do so. For this reason, bears might want to wait first for a new high before going short. Even so, shorting against the main trend is riskier than simply trading the series of higher highs and higher lows.
On the other hand, bulls cannot ignore the shape of the pattern that formed on most GBPUSD charts. As the chart below shows, this is a rising wedge – and rising wedges are bearish patterns. I did not use an oscillator on this chart, but I can bet that there is at least one bearish divergence with the RSI on the chart below.
How to trade the GBPUSD considering all the aspects mentioned in this article so far? Despite the strength and its resilience to fall, the path of least resistance for a medium-term perspective should be to the downside.
Because of that, bears have two options. One is to wait for the GBPUSD pair to make a new marginal high. Next, to wait for the price to reverse below the lower trendline of the rising wedge, before going short. The stop loss should be at the new high, and the take profit should be established by using a risk-reward ratio bigger than 1:2.
Another one is to simply wait for the price to break the rising wedge. On such a move, a similar trading strategy should be used (i.e. stop at the highs, 1:2 rr ratio).
