While we’ve seen elevated volatility in some of the commodity dollars this week, trade in the European currencies has been surprisingly subdued. My colleague Kathleen Brooks discussed the current 7-year low in EUR/USD volatility earlier today, but we are also keeping a close eye on the GBP/USD. Cable has only seen a 78-pip range thus far this week; if that range holds through tomorrow’s close, it would mark the smallest weekly range, including gaps, since March 2002!
Despite the tight range thus far, the GBP/USD has managed to peek above previous the previous 4.5-year high at 1.6820 on both Tuesday and Wednesday. Unfortunately for bulls though, that breakout has not been maintained on a closing basis. The reason this development is so significant is because many breakout traders likely went long above 1.6820 and the longer rates fail to break conclusively above that key level, the more uncomfortable those buyers will become. A break below this week’s low near 1.6765 could therefore lead to a miniature seller’s panic as bullish traders may be forced to run for the exits in unison.
Beyond the struggles of the exchange rate itself, the secondary indicators are also raising some yellow flags for bulls. The RSI indicator has formed a small bearish divergence at the recent highs, suggesting that the buying momentum is waning. The MACD confirms this analysis: though the indicator is still above its signal line and the “0” level, it appears to be rolling over and could soon cross back below its signal line for the first time since late March.
Of course, a confirmed break and daily close above 1.6820 would alleviate all of these near-term concerns and potentially open the door for a rally up toward 1.6900 or 1.7000 next week. Meanwhile, even if we do see a bearish breakdown, trend following traders could step in to support the pair near its 50-day MA at 1.6670. At this point, the longer-term bullish trend remains intact, though short-term traders may want to exercise caution unless or until GBP/USD rallies conclusively above the 1.6820 level.