The Forex market looks relatively calm, but it could be the calm before the storm. Last night’s announcement by US President Trump that he had called off a resumption of the kinetic war against Iran to give a peace deal a chance for another two or three days. This heightens the market expectation that very soon we will either see a peace deal or a return to war of uncertain duration. Either outcome will almost certainly move the market.
This means that markets are in a state of “wait and see”, and in this condition, prices tend to trade sideways, subject to the occasional rumour which could send the price more strongly one way or the other. What does this mean for this currency pair today?
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Increasing Volatility in Both Currencies Shows Market Focus
The GBP/USD currency pair is worth paying attention to right now as it is tending to produce movement and trading opportunities, like most US Dollar pairs. After a long period of consolidation, the US Dollar is showing signs of getting more direction, and increasing volatility, which should give more trading opportunities. More conclusive outcomes between the USA or Iran have been shown to move the US Dollar directionally in the past and would probably do so again.
The British Pound has seen more price movement lately on UK political instability and surprising economic data, but its role in a “war or peace” environment will probably be more as a “risk on” currency. So geopolitical risk off developments will likely send the pair lower, while the opposite would probably send it higher, and at a greater volatility than most other currency pairs except AUD/USD.
GBP/USD Technical Analysis
I see the price now just after the London open at the time of writing sitting in an area of support but looking indecisive and trading with low short-term volatility. The price is not strictly respecting the support level at $1.3400 which was influential and pivotal yesterday. This suggests a lack of conviction.
There are two new support levels formed yesterday which are not far below $1.3400 which have not yet been tested, at $1.3382 and $1.3347. Either could be strong support, but the failure to bounce cleanly at $1.3400 suggests we are not going to see a straightforward up day.
If the price does trade more bullishly and get clearly re-established above the support level at $1.3400, it has room to rise to the big round number at $1.3500, with minor resistance possible at $1.3440/50. These hypotheticals might come into play today if rumours emerge talking up a peace deal.
Looking at the US Dollar Index, it remains within yesterday’s range so is not making an especially strong move, but it is looking stronger this morning as a safe-haven, suggesting that pessimism is rising over the prospect of a deal between the USA and Iran being agreed before the weekend.
Watch Out for Early Peace or War
When a war ultimatum is given, you expect a final answer at the last minute – this is the nature of life-or-death negotiations. However, it is possible that President Trump might take this opportunity, if he needs an element of surprise in a military strike, to hit Iran today when they would least expect it.
Another possibility is that the agreement of a peace deal is suddenly announced today.
Either of these surprises could send the price moving very strongly higher or lower which could be very uncomfortable for anyone caught in a trade hoping for movement in the other direction. Unfortunately, there is nothing that can be done to mitigate this risk unless you just don’t trade today, apart from making a hedge.
Maybe the Market Will Ignore War or Peace
While President Trump has framed the current situation with Iran as a clear ultimatum with a binary outcome – I pause my attack for two or three days just to give you a last chance to agree a suitable peace deal – it might be that all his empty threats made over the past few weeks leads the market to disregard the ultimatum, despite the clear signs of US and Israeli military preparedness and frustration with Iranian negotiating positions.
If so, this will suggest that technical levels are more important that my assessments above indicate. That would mean we will be more likely to see a bullish bounce at $1.3382 or $1.3347, and that using that as a signal to enter a long trade could be a better idea than I currently think.
My Take on GBP/USD
I think that the best approach that can be taken here today will probably be to wait for the price to show a firm reversal when it reaches a key support or resistance level, and not to go for any other kind of trade like a breakout or breakdown.
Although it can be tempting to trade sudden movement triggered by rumors, this is usually a flimsy basis for trade that will result in a whipsaw and your stop loss getting hit.
Review, Support & Resistance Levels
My previous GBP/USD signal on 18th May was not triggered, but I was correct to highlight the importance of the resistance area around $1.3400.
Risk 0.75%.
Trades must be taken before 5pm London time today only.
Long Trade Ideas
Go long following a bullish price action reversal on the H1 timeframe immediately upon the next touch of $1.3382, $1.3347, or $1.3300.
Place the stop loss 1 pip below the local swing low.
Move the stop loss to break even once the trade is 25 pips in profit.
Remove 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
Short Trade Ideas
Go short following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.3500, $1.3530, or $1.3550.
Place the stop loss 1 pip above the local swing high.
Move the stop loss to break even once the trade is 25 pips in profit.
Remove 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
The best method to identify a classic “price action reversal” is for an hourly candle to close, such as a pin bar, a doji, an outside or even just an engulfing candle with a higher close. You can exploit these levels or zones by watching the price action that occurs at the given levels.
There is nothing of high importance scheduled today concerning either the British Pound or the US Dollar.
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