The GBP/USD pair fell during most of the session on Friday, but caught a significant bounce late in the day. With this bounce, we have formed a hammer right at the 1.58 level. This is significant in our opinion as this area was slated to be very significant support.
The reason we thought this area would be so supportive is the fact that it was the site of the ascending triangle’s breakout last summer. This was where the Pound got its boost all the way to the 1.63 handle. As then ascending triangle is so strong, we suggested that this area could be a source of support.
Having said that, we can’t claim victory quite yet, because after all we haven’t seen the bounce. However, it does look like this area is starting offer up a significant fight if you look at the last five or six candles. The majority of them are very neutral, and it appears that there is a serious fight going on here. There are concerns of Great Britain going into a “triple dip recession”, but there will also be questions about the “risk on” trade as well. With this being said, if we managed to break above the 1.59 level, which is essentially the top of this cluster, we believe that the risk to reward ratio justifies a long position. As far as selling is concerned, we see a lot of noise below and believe that although it could work, it will be a grind of a trade at best.
Because of all of this, we think this could potentially be the “sleeper” trade that nobody is paying attention to. The pair typically signifies a “risk on” attitude, and this is certainly something we are seeing in the equity markets. This could be a nice move given half a chance, and the risk to reward ratio is great as well. If we break the 1.59 level on a daily close, we are going to start building a position in this market. If we break down in this market, we will probably find other currencies to sell the Pound against, such as the Euro.
Written by FX Empire