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The GBP/USD currency pair has been exhibiting ranging behavior for well over one year, and as such, it has been a relatively stable currency pair. Having said that, it is an obvious truth that is sometimes neglected, that the US Dollar is the primary driver of major currency pairs, and one can say that remains true today, with the US Dollar retreating after briefly breaking out to a new long-term high price some weeks ago. Yet even as the price of the GBP/USD currency pair and the US Dollar index sink back into familiar ranges, there is increasing turbulence in the Forex market. Is this going to impact the greenback?
Why GBP/USD Matters as the US Treasury Acts to Prop Up the Yen
The first thing worth noting is unrelated to the Japanese Yen but important – last week saw both central banks on either side of this currency pair hold policy meetings, and both held rates with “hawkish holds”, meaning the voting was more in favor of rate hikes at both banks. So, each effectively cancelled the other out.
As the first week of August gets underway, this is increasingly looking like a minor detail, as the big news in the Forex market is the enlistment of the US Treasury in propping up the Yen. The Bank of Japan has been trying to do this for months with no lasting success – just spending billions to provide those betting against the Yen with more dips to buy. The US Treasury got involved, seemingly partly as a favour to Japan, partly as an indirect way to weaken the US Dollar, and President Trump seems happy about both. So, this clears a path for other relatively firm currencies such as the British Pound to rise against the US Dollar.
GBP/USD Technical Outlook: Is $1.3500 Too Strong to Overcome?
The price of cable has been rising ever since last Tuesday, and the upwards movement continued as this new week got underway with Monday’s Tokyo session seeing the price even exceeded the big round number and resistant area at $1.3500 by a few pips. However, as often happens with initial market opening movements in the Forex market, sellers have fought back and we are now seeing the price move lower. Having said that, the structure remains bullish, and we have not seen even short-term support levels printed recently breaking down.
Zooming out, as I mentioned earlier, the price has been ranging for well over one year and the price now is right in the middle of that range. This suggests that right now there may not be long-term buying or selling opportunities. I argue that with cable, the best opportunities tend to lie with the short-term momentum, which looks likely to be bullish, but would be much more so above $1.3500. It might be that a bounce at support anywhere could be an opportunity – if the Treasury is in the mood to sell Dollars, isn’t it wisest to look for short Dollar trades?
GBP/USD Daily Price Chart
Hidden Risks and Blind Spots in the GBP/USD Rally
It might be that I am putting too much faith in the US Treasury continuing to spend money on propping up the Japanese Yen. After all, the USD/JPY currency pair and the Yen crosses have already fallen by quite a lot, and Yen shorts have had a severe scare. Maybe the Treasury and the Japanese financial establishment will see this as enough action for the time being. If that is correct, and the price has firmly rejected $1.3500, then a further fall here becomes quite possible right now.
Another thing to worry about is that the US 10-year treasury yield remains elevated and bullish, with only a very minor gap lower as the new week gets underway. If long-term yields are holding up, that suggests a rebound in the USD could also easily happen this week.
Is $1.3500 Really That Important?
I have been painting $1.3500 as the pivotal point to watch right now. A potential problem with relying on that is that this level has been crossed many times without too much fuss over the past 15-month period of range between approximately $1.3000 and $1.3800. After all, the price is in the middle of a long-term range, and even the new government which has been formed in the UK which looks like to be somewhat more left-wing than the previous one does not seem to be driving much movement in this currency pair.
Where Next for the GBP/USD?
While it is important to be open to all possibilities, the short-term trend is bullish, and I still think the US Dollar will be somewhat on the back foot over the coming week as the US sells USD. I think the question traders will be asking right now is whether the price can break above $1.3500. That is the line in the sand to watch for the best clue as to where the next significant directional move is most likely to happen. A bullish breakout beyond there early in today’s London session could be a powerful catalyst for a firm move higher, giving a long trade opportunity if I am correct after the breakout.
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