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Sterling Breaks Major Resistance

Sterling hit a 2-week high of 1.3210 on Tuesday 23rd, from the low of 1.3033 on 22nd Aug, a 1.36% rise. Yet it pulled back as 1.3200 is a major resistance level. It rebounded this morning after tested the support level at 1.3160, also because the dollar is currently pulling back after a rally helped by the US New Home Sales figures. The 4 hourly KD of the dollar index is at a high level, suggesting a pullback, therefore, GBPUSD rallies this morning as a result.

The US New Home Sales for Jul released on Tuesday 23nd Aug, rose to 654,000, reached the highest level since Oct 2007. New Home Sales Change surged to 12.4%, beating expectations of -2.0%, and the previous figure of 1.7%. The dollar strengthened after the figures released, as a result, weighed on GBPUSD.

The rally of Sterling from 22nd to 23rd Aug had the appearance of a short squeeze. According to the data released by the US Commodity Futures and Trading Commission, the short positions in Sterling have increased every week since the Brexit vote, reaching a record high in the week to 16th Aug.

The Brexit may not be egregious in the long term, yet it will be a painful process in the following year before reaching a new deal with the EU. The uncertainty will also be reflected on the trend of Sterling.

The UK has a large current account deficit, requires consistent and plentiful foreign investments to balance it. Yet the consequence of the Brexit vote may lead to a decrease in foreign investments.

Although the first set of post-referendum data released last week was better-than-expected, more subsequent economic data is needed to have a clearer picture of the Brexit impact on the UK economy.

It is better to keep a cautious stance when trading Sterling as the uncertain political and business climate may last for a long term. Whenever Sterling is trading at a high level, it may trigger short positions. 1.3200 is a major resistance. In addition, the daily time frame KD indicator is above 80, suggesting a pullback.

Keep an eye on the US Existing Home Sales figures (MoM) for July, to be released at 15:00 GMT 1 on Wed 24th Aug. With positive readings, GBPUSD will likely test the newly formed support at 1.3200. While lower-than-expected figures, GBPUSD will likely bounce and test the resistance.

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