GBPUSD Range Turning into a Terminal Wedge

Currency traders have backed the US dollar up against a wall. Set against the euro, franc, Canadian, Australian and New Zealand dollars; the greenback is trying to hold a very visible level of support.

[B]Why Would GBPUSD Hold a Range?[/B] [B][/B]

         [B][/B]

         ·         [B][U]Levels to Watch:[/U][/B]

         [B]-Range Top:       1.6600 (Range, Fibs)[/B]

         [B]-Range Bottom: 1.6275 (Trend, Fibs, Pivot)[/B]

         

         ·         Both the divergent health between the US and UK economies as well as the pace of risk appetite in the market are critical fundamental drivers for GBPUSD. However, despite the influence that each holds over this pair and the general interest both has received in recent weeks; we have yet to see a true direction for either develop through price action. [Event risk over the coming days](http://www.dailyfx.com/calendar/) may force a move. We will pay particular interest to the second US GDP read.

         [B][/B]

         ·         In some circumstances wedge formations are promising for range setups and in other situations they point to an impending breakout. For GBPUSD, we are surely changing from the former to the latter. Congestion has been common place for the past three months; but a series of higher lows over the past two months is creating urgency behind a break. 

         

         [B][I]Suggested Strategy[/I][/B]

         [B][/B]

         ·         [B][U]Long[/U][/B][B]: Setting entry at 1.6340 will keep orders above the rising trend and recent spike lows. [/B]

         ·         [B][U]Stop[/U][/B][B]: A stop at 1.6240 is relatively tight; but necessary for risk/reward and the loose lows. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]

         ·         [B][U]Target[/U][/B][B]: The first objective equals risk (100) at 1.6440 and the second[/B][B] target is set to 1.6540. [/B]

                         [B]Trading Tip [/B]– Currency traders have backed the US dollar up against a wall. Set against the euro, franc, Canadian, Australian and New Zealand dollars; the greenback is trying to hold a very visible level of support. We have been at this floor for some time and marked false breaks in the meantime; but no trend has yet to take. Balancing this extended period of congestion with the consistently high level of volatility throughout the markets is a risky business; but necessary considering the lack of progress the market has generally made over time. Looking for a reasonable range, GBPUSD is a good mix of definable levels and reasonable timing. This pair has held resistance at 1.66 (with one short, false breakout through the beginning of this month) since the opening days of March. It is the support component of this formation that is troublesome though. A rising trendline (connecting the swing lows from Jun 8th to Jul 13th to Aug 17th) is squeezing price action into a wedge that is now less than 300 points wide. This is still wide enough for a few more swings; but the consistency of this chop and recent level of volatility means the probability of a breakout grows with each day. As such, timing is essentially and this is naturally taken into account through our strategy. Our entry order is aggressive but well above the recent swing low. At the same time, the stop offer little cover beyond the August 17th low. This is necessary to reasonably expect entry within the next 48 hours (we will cancel open orders by Wednesday) and offer a first and second target that do not require a new, major trend.

[B]Event Risk for the UK and US[/B]

[B]UK [/B]– There is a significant list of economic releases on the British docket; but the pound seems to be taking its guidance once again from risk appetite. This past week, the optimistic commentary to come out of the Jackson Hole Symposium was marred by the same caution-riddled language that we have seen over the past few months. On the whole, risk appetite seems to be steadily rising; but at a much slower pace than previous months. This is something to watch as volatility rises and market participants search for direction. As for event risk, the most high-profile indicator on deck is the first update on the 2Q GDP numbers. Updates on component figures can offer a significant shift in speculation; but historically, the UK revisions are modest and infrequently surprising. Other notable releases to keep an eye on include the GfK consumer confidence, BBA loan approvals and the start of the PMI data after the weekend.

[B]US [/B]– While it may be a second reading, the US 2Q GDP reading due later this week could significantly alter the second half growth forecast for the world’s largest economy. Updates on consumer spending, capital investment and exports will offer far more accurate readings on activity through the three month period and perhaps pull the economy closer or further away to the milestone of positive growth. Speculators will certainly respond to any surprises that come from this release. In the meantime, secondary indicators will not offer the same breadth of coverage; but they will provide us with timely statistics. Consumer confidence, durable goods orders, personal income and spending, and ISM manufacturing will tell us whether the US indeed is expanding through the third quarter.

                                      [B]Data for August 25 – September 1 [/B]

                                   [B][/B]

                                   [B]Data for August 25 – September 1[/B]

                                                     [B]Date (GMT)[/B]

                                   [B]UK Economic Data[/B]

                                   [B][/B]

                                   [B]Date (GMT)[/B]

                                   [B]US Economic Data[/B]

                                                     Aug 25

                                   BBA Loans for Home Purchase (JUL)

                                   [B][/B]

                                   Aug 25

                                   Consumer Confidence (AUG)

                                                     Aug 27

                                   GfK Consumer Confidence (AUG)

                                   [B][/B]

                                   Aug 26

                                   Durable Goods Orders (JUL)

                                                     Aug 28

                                   GDP (2Q P)

                                   [B][/B]

                                   Aug 27

                                   GDP (2Q P)

                                                     Sep 1

                                   PMI Manufacturing (AUG)

                                   [B][/B]

                                   Sep 1

                                   ISM Manufacturing (AUG)

[I]Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]> [/I]