Bank of America observes that GBP/USD is starting to break its secular downtrend, which has been in place since 2008. Recent technical signals suggest a potential rally towards 1.40, contingent on a sustained break above key resistance levels and the 200-week SMA.
Key Points:
- Secular Downtrend: GBP/USD has been in a secular downtrend since 2008, attempting to break higher three times in the last 18 months but failing.
- Technical Resistance: Previous bearish bias was suggested while GBP/USD remained below resistances in the 1.2850-1.29 area, targeting declines to 1.2450 and potentially 1.21.
- Impulsive Move: An impulsive move through these resistance levels could signal the end of the secular decline and a rally toward 1.40.
- Current Breakout: As of the week ending July 12, GBP/USD is starting to break above resistance lines and the 200-week SMA at 1.2849, turning the outlook from pessimistic to optimistic.
- Confirmation Needed: A few weekly closes above the 200-week SMA would further confirm the trend change to an upward trajectory, supporting the (ABCDE) labeling as the end of a falling wedge pattern.
- Positioning Risk: A significant risk is the current positioning, with net long GBP futures divided by open interest at its highest level since 2011, indicating potential overextension.
Conclusion:
BofA notes a potential technical shift in GBP/USD as it starts to break its long-term downtrend. A sustained move above key resistance levels and the 200-week SMA could signal a rally towards 1.40. However, the high level of net long GBP futures poses a risk, suggesting caution in the face of potential overextension.
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This article was written by Adam Button at www.forexlive.com.
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