TA of the Day: Is the Uptrend in GBP/USD Over?


Sterling has reached its highest level against the U.S. dollar in about two and a half years and is also doing well against the euro.

The pound’s rally is largely driven by speculative bets on interest rates based on expectations that the Bank of England (BoE) will maintain higher interest rates for a longer period compared to the Fed and ECB.

But this makes sterling vulnerable to shifts in monetary policy expectations, and this surge could quickly unravel in markets still unsettled by early August’s turbulence.

Additionally, sterling’s strength is being supported by economic difficulties in the eurozone and emerging challenges in the U.S., coupled with the Bank of England’s reluctance to fully commit to lowering interest rates.

Although GBP/USD has made notable gains, analysts warn that the currency is at risk of significant volatility due to continued speculative interest rate bets and upcoming events such as is U.K Chancellor Reeves’ first budget at the end of October and U.S. elections in November.

Fundamentals are cautiously bullish but what about GBP/USD’s technical outlook?

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Welcome to TA of the Day (TAOTD)! 👋

Let’s focus on the current technical setup of the GBP/USD based on the 4-hour chart:

GBP/USD 4H | 2024-08-29

📈 Technical Analysis of GBP/USD 4-Hour Chart 

Let’s analyze GBP/USD using key technical analysis concepts covered in our forex course.

Simple Moving Averages (SMAs):

  • 20-period SMA: Positioned around 1.3206. The price is near this level, showing short-term consolidation. The upward slope indicates that the overall short-term trend is still bullish.
  • 50-period SMA: Positioned around 1.3133. The price is currently above this level, indicating continued medium-term bullish momentum. The upward slope suggests ongoing buying pressure.
  • 200-period SMA: Positioned around 1.2920. The price is well above this level, indicating strong long-term bullish momentum. The upward slope confirms the long-term trend remains intact.

Relative Positioning of Moving Averages:

  • The 20-period SMA is above the 50-period and 200-period SMAs, indicating a strong short-term bullish trend within the broader bullish context.
  • The 50-period SMA is also above the 200-period SMA, reinforcing the medium-term bullish trend.
  • This alignment of the moving averages suggests that the overall momentum is strongly in favor of the bulls across multiple timeframes.

Parabolic SAR:

  • The Parabolic SAR dots are positioned above the current price, signaling a potential reversal or correction in the short term.
  • The current positioning suggests that the bullish momentum might be weakening, leading to a possible pullback.

Stochastic:

  • The Stochastic Oscillator is currently in the oversold region, with the %K line at 22.56 and the %D line at 19.93.
  • This indicates that the pair might be nearing the end of its bearish correction and could be due for a bullish reversal soon.
  • But it’s important to wait for confirmation before acting on this signal.

🕵️ Key Observations

Price Action:

Let’s analyze the price action of GBP/USD from the start of the chart:

  1. Initial Phase (Early August):

    • The chart begins with the price around 1.2850.
    • There’s initial volatility with price swings between approximately 1.2750 and 1.2850.
    • This period shows a slight downward bias with lower highs and lower lows.
  2. Bottom Formation (Around August 10-11):

    • The price reaches a low point around 1.2700-1.2720.
    • This marks the end of the initial bearish phase and the start of a reversal.
  3. Sharp Reversal (Mid-August):

    • From the low point, there’s a dramatic and swift upward movement.
    • The price breaks above previous resistance levels with strong momentum.
    • This move is characterized by long green (bullish) Japanese candlesticks, indicating strong buying pressure.
  4. Steady Uptrend (Mid to Late August):

    • After the initial sharp rise, the price continues to climb in a more measured manner.
    • The uptrend forms a clear pattern of higher highs and higher lows.
    • Each pullback is typically shallow and quickly followed by further upward movement.
    • The price stays consistently above the rising 20-period SMA during this phase.
  5. Acceleration (Late August):

    • Towards the end of August, the uptrend accelerates.
    • There’s another series of strong bullish candles pushing the price to new highs.
    • The pair reaches its peak around 1.3270-1.3280.
  6. Recent Pullback and Consolidation (Current):

    • After reaching the high, there’s a pullback.
    • The price retreats from the peak, forming several red (bearish) candles.
    • This pullback is deeper than previous ones in the uptrend.
    • The most recent candles show some consolidation around the 1.3170-1.3180 level.
    • The recent price action suggests a potential pause in the uptrend or a possible correction.

Market Structure Evolution:

Let’s describe how the market structure has evolved over time:

  1. Initial Bearish Structure (Early August):

    • The chart begins with a bearish structure.
    • Price is making lower highs and lower lows.
    • Price is below the visible moving averages, indicating bearish sentiment.
  2. Bottoming Process (August 6-8):

    • The bearish momentum slows down.
    • Price starts to consolidate around the lows.
    • This represents a potential change in market structure, signaling a possible end to the downtrend.
  3. Bullish Reversal (Mid-August):

    • A sharp reversal occurs, changing the market structure dramatically.
    • Price breaks above recent resistance levels and the short-term moving averages.
    • This marks the first higher high and higher low, signaling a potential trend change.
  4. Establishment of Bullish Structure (Mid to Late August):

    • The pair starts consistently making higher highs and higher lows.
    • Price stays above the 20-period SMA, which now acts as dynamic support.
    • The moving averages begin to align in a bullish manner (short-term above long-term).
    • An upward channel starts to form, providing a clear structure for the bullish trend.
  5. Strengthening Bullish Structure (Late August):

    • The uptrend accelerates, with price making sharper moves to the upside.
    • The gap between the price and the longer-term moving averages (50 and 200 SMAs) widens.
    • The upward channel becomes more defined.
    • Pullbacks become shallower, indicating strong bullish sentiment.
  6. Peak and Initial Pullback (End of August):

    • Price reaches a new high, marking the peak of the current bullish structure.
    • A pullback begins, which is deeper than previous corrections in the uptrend.
    • This represents the first significant challenge to the established bullish structure.
  7. Consolidation Phase (Current):

    • Price enters a consolidation phase after the pullback.
    • The market structure is now less clearly defined.
    • The bullish structure is being challenged but not yet broken.

Support and Resistance Levels:

  • Immediate support: Around 1.3170 (current price level and 20 SMA)
  • Next support: 1.3130 (50 SMA)
  • Strong support: 1.2920 (200 SMA)
  • Immediate resistance: Previous high around 1.3260 and and the psychological level of 1.3200.

Key Swing Points:

  • Swing low: Early August around 1.2665.
  • Swing high: Late August around 1.3260.

Potential Chart  Patterns:

  • The recent price action could be forming a bull flag pattern, with the flagpole being the sharp rise and the flag being the current consolidation.
  • This is is typically a trend continuation pattern.

🤔 Potential Trade Scenarios

Is GBP/USD a buy or sell?

Long Bias:

  • Consideration Point: Consider entering a long position if the price finds support near the 20-period SMA at 1.32060 and shows signs of a bullish reversal, such as a crossover in the Stochastic Oscillator or the Parabolic SAR flipping below the price.
  • Invalidation Point: Consider setting a stop-loss below the 50-period SMA at around 1.31300 to manage risk.
  • Potential Target: Look for a move back towards the recent high around 1.31890 or higher if the uptrend resumes.

Rationale: The overall trend is bullish, and the oversold Stochastic suggests a potential for a bullish reversal. The key is to wait for confirmation from the price action and indicators like the Parabolic SAR.

Short Bias:

  • Entry Point: Consider entering a short position if the price fails to hold above the 20-period SMA and the Parabolic SAR remains above the price, indicating continued bearish pressure.
  • Stop-Loss: Consider setting a stop-loss above the recent high at around 1.32100 to manage risk.
  • Target: Initial target could be the 50-period SMA at 1.31336, with further downside potential towards the 200-period SMA at 1.29204.

Rationale: The Parabolic SAR above the price and the potential for further downside indicated by the consolidation suggest a possible short-term correction. The oversold Stochastic does require caution as a reversal could occur.

📝 TAOTD Summary

  • Current Position: The price is in a strong uptrend but currently consolidating around 1.3160. The Parabolic SAR indicates potential bearish pressure, while the oversold Stochastic suggests a possible bullish reversal.
  • Trend: The overall trend is bullish, with the price above the 200-period SMA, confirming long-term strength. The short-term trend is consolidating, with potential for either a continuation of the uptrend or a short-term correction.
  • Key Levels: Support at 1.3130 (50-period SMA), with resistance at the psychological level of 1.32000 (and 20-period SMA).
  • Momentum: The Stochastic Oscillator indicates oversold conditions, while the Parabolic SAR suggests potential bearish momentum in the short term.

Overall, the price action shows a clear transition from a bearish to a strongly bullish trend, followed by a recent pullback.

The movement has been quite directional, with the uptrend being particularly strong and persistent.

The recent pullback could be seen as a normal correction within an uptrend or potentially the start of a more significant reversal, depending on how price behaves around current levels and key moving averages.

The Stochastic oversold condition and the potential bull flag pattern suggest that the uptrend might resume soon, but the bearish signal from the Parabolic SAR indicates caution in the very short term.

While the current structure is bullish, and is now in a phase that could determine whether the bullish structure continues or if a more significant correction or reversal is in store.

The key levels to watch for maintaining the bullish structure are the recent swing lows and the 50-period SMA.

A breakdown below these could signal a change in the medium-term market structure.