GBPUSD rebounded strongly yesterday on a positive mix of factors stemming from the Bank of England and the general recovery in risk appetite yesterday amid positive Evergrande news out of China.

However, it’s doubtful that this GBPUSD bounce can last or extend for much longer. 

• Firstly, the Bank of England was only slightly hawkish, with one more decent vote (compared to the August meeting), and by using the specific words that "some modest tightening would be required" in the future. But, this is not a big surprise as it’s already well priced in GBP exchange rates. The bar remains high for UK economic data to surprise positively going forward. And, if we start getting negative surprises, then GBPUSD could quickly fall. 
• Secondly, it seems that the strong GBPUSD rally yesterday had more to do with the Evergrande news out of China than with the Bank of England. It was a knee-jerk reaction of risk appetite making a return across markets, with the US dollar being the weakest and risky currencies rallying broadly (of which GBP is a part of to some degree). 
• Thirdly, the Fed is clearly turning more hawkish (bearish for GBPUSD). At the FOMC meeting on Wednesday, they also nudged higher their projections for rate hikes and hinted that further progress on jobs remains the last hurdle before they can taper QE. Hence, if the next Nonfarm Payrolls report comes out strong (due on October 8), the Fed will have no obstacles to begin tapering QE in November and start thinking about tightening in 2022 (bullish USD).

On balance, the probabilities favour short GBPUSD trades in this situation. Below we look at the specific technical setup and which levels to watch for shorting opportunities.

Cable bounced at 1.36 yesterday, which is a strong support area ( discussed in our weekly analysis on Monday). Certainly, the bounce was also reinforced by the technical factor from the support here.

But, the broad technical picture on the daily timeframe shows us that GBPUSD is in a range. Support is firmly at 1.36, while resistance is located at the 1.39 zones and 1.40, respectively (see D1 chart below).

So, the setup is clear here. We are waiting for the rally to reach the 1.39 area at least, and then we look for a bearish signal or pattern there. 

Since we are in a range environment, oscillators like the Stochastic indicator (shown on the chart) can work well to confirm potential trade signals. It's even better if this signal occurs, e.g., while the Stochastic is showing overbought levels.

Entries: 

• Bearish signals or patterns anywhere in the 1.39-1.40 area would be the trigger for this trade. For now, we need to wait for this to occur.
• Look for the Stochastic oscillator to confirm the bearish signal (i.e., bearish crossover from above 80 on the Stochastic would suffice).

Stop: 

• Place the stop above the high of the entry pattern.

Targets:

• Back down to the 1.36 support. However, be prepared to exit earlier if needed, as the price may not move in a straight line down.
• GBPUSD could also break below 1.36, but that is an entirely different setup and, for now, is beyond the scope of today’s email.

• September 16, 2021 - Long GBPJPY from 151.00 (entry at lower levels), exited at 151.50 after the rally was rejected (unfortunately) slightly before the 152.00 target = +50 pips profit