Possible Upside Play for British Pound

10/15/2008 1:44 pm 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 retracement levels in grey; 50-period simple moving average in light blue.)

Price action on the GBP/USD daily chart, as shown, has been making what could be considered an upside correction or retracement after hitting a 5-year low late last week. This retracement has stalled just shy of reaching a key 50% Fibonacci retracement level that corresponds with a prior support/resistance level around the 1.7750 region.

If there is any continued upside momentum on this correction, that 1.7750 region should serve as strong resistance to the upside. Indeed, oscillators like the displayed Stochastics are giving hints that overall momentum may potentially be to the upside, as they are just emerging from oversold.

At the same time, though, price action in the last couple of days has been indicating that this pair is having a hard time making any sustained up moves. A failure in the current upward correction would thus be confirmed on a clean breakdown of the most recent uptrend support line (in green, currently in the 1.7250 region). In this event, further support to the downside resides around the 1.7050 region.

By James Chen, Chief Technical Analyst, FX Solutions

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