What a day has it been in the financial markets! Stocks and the dollar have fallen viciously as traders respond to news of the Chinese currency devaluation by piling in on safe haven assets. The Swiss franc, Japanese yen and gold have all found some solid support.
One particular FX pair that has caught my attention has been the GBP/USD, which has gained ground despite some weaker-than-expected UK economic data today which showed among other things that wages only increased by 2.4% in the three months to June compared to a year earlier period. This represents a sharp slowdown from the 3.2% rate recorded in the three months to May. But given that the pound has shrugged off the news – at least against the dollar, anyway– this is potentially good news for the Cable going forward.
Indeed, the GBP/USD appears to be on the verge of a BIG breakout. As the daily chart shows, price is peeking out of a pennant consolidation pattern and if it closes the day above these levels then we may see some solid gains in the days and weeks to come.
The Cable may already have formed a base in April when it hit a multi-year low of 1.4565. Since then, price has been making a series of higher lows and higher highs. The last major high was formed around the long-term 50% retracement level at 1.5875. For the Cable to revisit that high it will need to break decisively above the next key resistance level at 1.5670.
The bullish setup will only be invalidated if the most recent ‘higher low’ is violated. Until and unless we see that, the path of least resistance is now clearly to the upside.