Watching Price Action on GBP/USD

10/30/2008 9:36 am EST

Focus: FOREX

Chart

(Price on 1st pane, Slow Stochastics on 2nd pane; uptrend lines in green; downtrend lines in red; horizontal support/resistance levels in yellow; Fibonacci retracements in grey; 50-period simple moving average in light blue.)

Price action on GBP/USD, a daily chart of which is shown, has rebounded in a major way for the last couple of days. Among other catalysts of this rebound, traders’ expectations of potential dollar weakening as a result of an expected FOMC rate cut on Wednesday contributed to the major bullish push.

After double-testing a low extreme at around 1.5265-75, price has formed two long, bullish bars in its quest to climb back up as of mid-session in New York on Wednesday. Momentum appears clearly to the upside as oscillators like the displayed Stochastics, which are just emerging up from oversold, are also supporting a bullish outlook.

Currently, price is approaching a critical juncture. This juncture combines a key 38.2% Fibonacci retracement level (the high-to-low retracement span being measured from the swing high on 9/25/2008 to the extreme swing low on 10/24/2008) with a significant prior support/resistance level around the 1.6550 region. In the event of a strong break above this level, price could target further resistance around the 1.6800 region, a key prior support area and the bottom of the previous triangle.

Further major resistance above that resides around the 1.7000 area, an important psychological level and the 50% Fibonacci retracement.

By James Chen, Chief Technical Analyst, FX Solutions

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