This week’s corrective price action in the Fx market looks like a normal phenomenon following last week’s volatile gyrations in USD pairs that arose as a result of the Fed’s hawkish surprise. The market moved on the Fed’s surprise but is now taking some time to digest the moves.

So far, the corrections this week have all the signs of a retracement preceding a continuation. Still, it doesn’t simply mean that the USD will continue to move higher from here in a straight line. The fact that there was no continuation of the USD moves this week indicates market participants are unsure about the direction and are awaiting more newsflow and economic data to provide them with clues. In this regard, next week’s Nonfarm Payrolls (Friday, July 2) is the main event that traders could care about currently when it comes to the dollar and the Fx market.

What this means is that USD pairs may continue to consolidate (though likely with a bullish undertone) until next week’s NFP release. The last two NFP reports were big disappointments. It’s no wonder that traders want to see what the July report shows before fully believing the Fed’s hawkish story. 

Overall, the USD has likely bottomed at this point and should continue to broadly strengthen over the coming weeks. However, it will be harder for that to come by if NFP and other incoming economic data from the US disappoint. But on balance, it should be easier for the dollar to strengthen on strong incoming US data than it would be for it to weaken on disappointing data - meaning the balance of risks at this stage favours bullish USD forces to persist and drag the currency further higher.

In line with the bullish USD view described above, we are looking for short entries on the GBPUSD pair. Indeed, the pound is experiencing a reality check at the moment on several fronts. One of these is the fight against the Covid pandemic, in which the UK is experiencing a rapid rise of infections with the delta variant.

Yesterday, the Bank of England dovishly surprised the market by communicating a wait and see stance and suggested rate hikes are still some time away. The overcrowded bullish GBP positioning suggests the downside GBPUSD correction that started last week can extend further. 

And if the dollar continues to strengthen broadly, it will provide the perfect cocktail for GBPUSD to correct to new local lows.

The charts confirm the shift to a bearish narrative here. Namely, GBPUSD recorded a bearish daily candle pattern after being rejected at the 1.40 resistance on the day before. The area is also a strong Fib confluence resistance, including the 50% Fib from the whole drop coming from the top. 

The chart below also shows a potential bearish channel (not fully confirmed yet) that may define this new bearish leg. GBPUSD should respect the falling trendline of this channel and generally stay below 1.40. These resistance zones would be early indicators to watch for possible changes to this setup.

The price action this week points to a pattern known as break-retest-continuation - a confirmation pattern that often occurs after breakouts of important technical zones. Remember, 1.40 was the big support in GBPUSD and was broken last week. This week, the price successfully came back to it, retested the resistance and was rejected there. 

This price behaviour on the charts points that a new bearish leg is likely to start, with GBPUSD set to revisit last week’s lows around 1.38 at least.

Entry: 

• Look for entries around current levels (near 1.39);
• or another scenario would be if GBPUSD makes another push higher, possibly slightly above 1.40 and toward the channel’s resistance (see chart). This would allow for better entry levels. However, it also means there is a greater chance of missing an entry if GBPUSD continues straight down from here.

Stop: 

• Above the 1.40 resistance discussed above;
• For specific levels, the “volatile” GBPUSD may easily test 1.4050, so in this regard, stops as high as slightly above 1.41 would make sense

Targets:

• 1st target - 1.38 zone
• 2nd target - 1.37 zone
• 3rd target - 1.35 (potential longer-term target)

• N/A; (USDCHF setup not triggered yet)