Directionless GBP Likely to Remain Volatile

Pound Sterling Technical Forecast: Mixed

• GBP/USD price action poses a stern challenge as excessive volatility brings massive price swings
• A distinct lack of direction in the pair opens up potential range trading opportunities

The pound sterling has endured a roller coaster ride ever since the former UK finance minister Kwarteng announced unfunded tax cuts and potentially open-ended borrowing as part of the government’s new growth plan. GBP/USD has recovered from the shock low of 1.0340 and trades slightly lower than the levels witnessed prior to the September 23rd announcement.

The ‘mixed’ bias for cable emanates from the fact that the long-term downtrend remains intact but higher lows since the latter stages of September leaves the door open for a possible bullish reversal. In times when markets lack a discernable direction, range trading setups warrant further attention.

GBP/USD Technical Outlook

The daily GBP/USD chart reveals a rather complicated picture that is worth exploring further. Cable trades well above the September low and has failed to rally on the back of the recent recovery. It would appear that the local currency, like the rest of the nation, is suffering from a lack of direction.

The daily chart shows a narrowing pattern emerging as the pair posts higher lows and lower highs – hinting at a possible period of consolidation in the week to come. Further complicating the outlook is the recent break above trendline resistance and the retest of the trendline (this time as support) on Friday around the 1.1110 level. A daily and weekly close above the trendline is likely to keep bulls engaged into the start of next week. However, price action would have to trade above 1.1410 and take out the high at 1.1495 if a longer-term move is to be entertained.

On the other hand, a break below the descending trendline and 1.1110 reignites a longer-term bearish continuation with 1.0923 the nearest level of support

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Potential For GBP Range Trading

The 4-hour chart reveals considerable resistance at 1.1460 level (purple rectangle) which has led to the latest sequence of price declines heading into the weekend. This potential trading range will be tested in the early stages of next week. Levels of resistance and support (highlighted in yellow) are clearly defined. One thing to keep in mind when trading ranges is to adopt sound risk management to mitigate the risk of directional breakouts.

GBP/USD 4-Hour Chart

Source: TradingView, prepared by Richard Snow

Price action starting form next week is likely to respond to developments in the leadership race for the position of UK prime minister. As the election process draws on, GBP/USD is likely to oscillate. There is also a chance that the race is decided by Monday afternoon, in which case, cable may receive a slight boost.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX