GBP/USD Finally Takes 1.70
Forex markets saw some critical breaks in closely watched resistance levels in some of the most commonly traded pairs. Most of these moves have been in line with the forecasts that we have outlayed here in previous weeks. Last week, we wrote that the “GBP/USD is closing in on its highs for the year and the much coveted 1.70 resistance level. It is looking increasingly likely that the GBP/USD will be breaking 1.70 before the end of this month, so Dollar bulls should be looking to other pairs in order to play the possibility of additional rallies in the greenback.”
Most broadly, our view is that the US Dollar is still highly undervalued when compared to most of its regional counterparts. The basis for this forecast rests on the fact that the US Federal Reserve is actively reversing its historic QE programs and is now clearly intent on a path of policy tightening that will result in higher interest rates some time next year. Since this is not the case in most regions in the world (look at the Eurozone, for example), the main outlook for the US Dollar is still positive and this should continue to be the case for the remainder of this year.
But, as expert forex traders understand, markets can build on prior momentum and create extreme moves that are difficult to stop. The latest example of this can be seen in the GBP/USD where the latest bull run has matched our forecast and moved through the closely watched 1.70 mark. To be sure, this is a highly positive move but now that the move has occurred, there is reason for Sterling bulls to exercise some degree of caution and be conservative (at the very least) when placing new long positions in the GBP/USD.
The Week Ahead in Forex Markets: Watch For Reversals
In the week ahead, forex traders will need to watch for currency reversals as there is an increased likelihood that much of the market will look to take profits on the latest moves. Specifically, this means that current long positions in the GBP/USD are vulnerable to the downside if we start to see profit taking and stop losses tripped in weak longs (long positions established at elevated levels).
Overall, the latest moves in the GBP/USD are highly bullish and suggest additional runs higher over the long term. But for those trading forex on an intraday basis, it is important to at least keep position sizes small if you are looking to trade in-line with the most recent trends. Prices are trading at yearly highs in the GBP/USD so it is a much better idea for conservative traders to wait for dips before committing to new long positions. There is clear scope for opportunities to be seen in this area sometime next week.