GBP/USD: Cable dangles above support as bears seek downside break

• Weekly charts can be used to assess longer-term directional risks
• GBP/USD price action shows bears are gaining ascendancy over bulls
• Downside is favoured but not a given
• Friday’s US core PCE inflation figure will be important for markets this week

This week comes across as a pivotal one for GBP/USD, teetering above technical support ahead of arguably the most important data release worldwide when it comes to the global interest rate outlook, the US core PCE deflator. If the recent price action is any indication, risks look to be building to the downside.

Bears winning the battle in GBP/USD

When in doubt, zoom out.

Approaching the end of the quarter, a period that often delivers inconclusive price action as investment decisions are influenced by portfolio weighting, market to market positioning and tax considerations, there are few better times than do that now.

To help dial down the noise, weekly charts can be used to obtain cleaner message on directional risks. And the message for GBP/USD is that risks are skewed to the downside.

The big topside wick on the candles tell a story of bears gaining the ascendency over bulls, succeeding in defending pushes above 1.2800 in late May and June. The inverse hammer candles warned of downside risks that materialised last week, seeing GBP/USD move away from the top of the symmetrical triangle it’s been trading in for the better part of a year.

Waiting for a signal to sell

In the near-term, watching how the price interacts between support at 1.2635 and 50-day moving average located around 1.2628 may be instructive on how to proceed next. While downside risks are obvious based on the charts, until that zone is broken definitively to the downside, selling preemptively comes across as a high-risk setup.

Should we see GBP/USD dribble lower, you could sell the break with a stop above 1.2635 for protection. While there may be some buying just below 1.2600, there’s little meaningful support evident until 1.2500. That looms as a possible downside target with the bottom of the triangle the next around 1.2450.

Potential soft US inflation report a complicating factor

From a fundamental perspective, there’s little on the domestic UK calendar to shake the boat this week, leaving US data to set the agenda, especially Friday’s PCE deflator given it’s the Federal Reserve’s preferred inflation measure.

One complicating factor to the bearish GBP/USD trade is that the core PCE reading is likely to show continued disinflationary pressures based on trends in other series, an outcome that may add to pricing for Fed rate cut bets. It’s something to be aware of given GBP/USD has been moving in line with riskier assets recently, but the counterargument is that such an outcome may already be in the price. 

-- Written by David Scutt

Follow David on Twitter @scutty