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GBP/USD Lost Upside Momentum on Monday

Despite the bank holiday in the UK and the US, GBP/USD was under pressure on Monday. The pair only posted about a quarter percent loss but selling was persistent in the first half of the European session.

The pair had been recovering higher after hitting fresh 5-month lows late last week. On a daily chart, Friday’s rally resulted in the formation of a morning star candlestick pattern. This pattern often signals reversal potential, although in this case, there has certainly been a lack of follow through.

This Week May Lack a Clear Driver

The economic calendar is light for the week. The data release that stands out is the release of GDP figures out of the United States on Thursday.

Up until now, Brexit headlines have dominated the pair. There are two major events behind us. First, Theresa May has announced her resignation. Second, the EU Parliament election results were announced yesterday.

With these events behind us and a light economic calendar, a driver might be lacking for a sustained move.

At the same time, I think Nigel Farage, head of the Brexit party, might try and take the spotlight. Since PM Theresa May will soon be out of the picture, he may look to fill the gap in Brexit negotiations.

Farage has a hard stance that the UK should leave the EU no matter what, even if that means leaving without a deal.

Technical Analysis

The daily chart above shows the mentioned morning star candlestick pattern. The decline since yesterday’s high has shadowed that pattern quite a bit. I expect a break below Friday’s low will cause worry to GBP/USD bulls.

Just below Friday’s open, a horizontal level is found at 1.2654. This level has been respected in the past as can be seen on the 4-hour chart above. Note the earlier channel break. This channel had contained price action for most of the month ahead of the breach. This is what led me to believe we may see a recovery rally in my prior report.

The hourly chart shows 1.2654 holding thus far. What happens in North American trading will be important. Especially if the last 4-hour candle closes above 1.2677. This level will be significant for a directional bias in the session ahead.

Ultimately, today’s high of 1.2702 will be pivotal. Only a break above it would negate the bearish momentum seen since yesterday. The high was set at the European open where GBP/USD briefly saw volatile swings in both directions.

Bottom Line:

• Recent Price action casts a shadow of doubt on my earlier view of a relief rally

• At the same time, a catalyst seems to be missing for a break lower this week

• GBP/USD appears to be quite oversold after declining much of the month therefore I don’t think it makes sense to chase it lower into the end of the month.