GPB/USD looks interesting. Here's why

During the course of the last few weeks the EUR and CHF have both broken through important resistance against the USD, and moved nicely higher in what looks like the start of longer-term trends. So far, Sterling has not been able to do the same. GBP/USD has indeed rallied nicely of late, but has yet to break through important overhead. What that presents us with is a very interesting scenario.

Take a look at the intraday GBP/USD chart below (three hour bars). Notice how the market has spent the last few trading sessions since the middle part of last week moving in a sideways consolidation between about 1.7750 and 1.7930. This is a pretty natural action following the strong rally up from a little above 1.7500 the market experienced during the early part of last week.

Now take a look at the daily GBP/USD chart below. We can see that last week's strong run higher took the market right up to the area of the last significant peak, which was put in back during the latter part of January. In the course of doing so, prices spent a significant amount of time outside the upper Bollinger Band (the overlay lines on the chart). As this is generally not something sustainable, it was to be expected that the market was going to have to spend some time consolidating to allow the Bands to catch up to price. That has happened, so what now?

Refer again to the intraday chart, this time with an eye on the Bollinger Bands. During the consolidation, especially in the last day, the Bands have begun narrowing rather quickly. That, by itself, is not a signal, but it does provide the opportunity to look for something interesting to happen before long. Narrow Bands are often a precursor to significant moves. One need look no further than prior to the move up from 1.75 to see that.

The Bands are not that narrow right now, but if GBP/USD continues going mostly sideways today, they will start to get there. My personal feelings is that if the market holds off from doing anything significant in the next 24 hours, we could have a great buying opportunity. GBP/USD will eventually follow EUR/USD higher. It's just a question of when and how strongly. The longer the current consolidation takes, the more likely that move will be powerful and sustainable. If it happens too quickly, though, the market will rapidly get overbought and the move will almost certainly stall out.

John Forman is the author of The Essentials of Trading (Wiley). To celebrate the book's release later this week, there will be a special 24-hour only promotion with giveaways worth $1000s. Find out more at www.TheEssentialsOfTrading.com/special-offer.html.