Could GBP/USD head higher this week?

This week will be lighter in terms of major scheduled economic events than last. That being said, there still be some potentially market-moving data to watch. Among other things, we will have the Australian employment report and GDP estimates from Japan and the Eurozone. So, the Aussie, yen and euro could all move sharply at various points this week. But to us, the pound and in particular the British pound/U.S. dollar (GBP/USD) currency pair looks as the most interesting one to watch this week.

In addition to the technical significance of the 1.35 handle which is holding as support for now (more on this below), there’s also some important UK and US data coming up on Tuesday – namely, UK jobs and wages and US retail sales figures. What’s more, the dollar rally seems to have paused for breath. The greenback’s hiatus could further aid the cable’s recovery or even accelerate it if the former were to fall further.

From a technical perspective, the GBP/USD looks like it has formed at least a short-term bottom after it ended a three-week losing streak last week with the formation of a doji candle at long-term support around the 1.35 handle. As well as a psychologically-important level, this is also where several long-term technical factors converge.

As can be seen in the quarterly chart (inset) 1.35 was a prior support back in 2009, which briefly broke down post-Brexit but now that we have moved back up above it, this level could very well turn into the new long-term support. The 1.35 level also marks the heads of the hammer candles that were formed on the monthly and quarterly charts. What’s more, 1.35 is where this year’s trading started, and it comes in just below the 200-day moving average, which has now been reclaimed again by the bulls.

Furthermore, one can observe a small positive divergence on the momentum indicator RSI, which made a higher low at oversold levels when the cable made its latest lower low. It indicates a loss of bearish momentum, which could be a bullish sign.

But the bulls still need to chop some would. First and foremost, they now need to push the cable above last week’s high of ~1.3615 and hold their ground there for a while. If that were to happen then at the very least, 1.3715 would become the immediate objective – this being the last support prior to the breakdown, so could turn into resistance. The next bullish objective or potential resistance comes in at 1.3895, likewise an old broken support.

In summary, given the above technical reasons, we are now bullish on the cable for as long as it continues to hold above 1.35 on a daily closing basis. But if it were to break this level down decisively then all bets would be off.