Forex Technical Update
Expanded Flat: The 4H GBP/USD chart shows the market respecting the 200-period simple moving average and the 38.2% retracement (of 1.6618-1.5271 swing) as resistance. Although the bearish momentum was lost with the RSI rising above 60, no bullish momentum was established in this time-frame as the RSI failed to tag 70. The ability of the market to return below 1.57/1.5690 could be a sign of failed bullish breakout. Taking the sideways action since September 21 as a whole, it appears we may have completed an ABC expanded flat correction.This is a flat, where B expands beyond A, and C > A expanding beyond B.
Double Bottom: However, the ability to hold support at 1.57/1.5690 in the Thursday US session suggests the correction is not over, and that the market is seeing a double bottom. (A pattern with 2 relatively similar price lows followed by a rally above the price high of the pattern - 1.57). Then if a rally pushes above 1.5786, we are looking toward a short-term extension of this current upswing from 1.5271 toward 1.59. At this point, the RSI reading can provide some clue as to momentum, because a reading above 60 would suggest a lost of bearish momentum in the daily time-frame, and a rally above 1.59 opens up 1.61, 61.8% retracement, especially if another support pivot can be established above 1.5780.
QE vs QE: Both the BoE and Fed are considering expansion of Quantitative Easing. Where as the Bank of England already gave the market some details on its intention, the Fed might be saving this option further down the road. But the prospect of QE3 by the Fed can drive the USD down. The point is, a rally in GBP/USD is not going to be a function of a bullish sterling, but a very weak USD, which might be driven by the market pricing in expectation of QE down the road. A rally toward 1.61 is seen in the daily chart only as a return to the 200 period simple moving average, so it is not even a sign of a bullish GBP/USD market - a squaring off if you will of the expectations.
So what do you think, expanded flat or double bottom?
Fan Yang CMT is the Chief Technical Strategist FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.