GBP/USD Finds Strong Support at 1.38, But Bearish Bias Persists

Summary:

GBP/USD possible double top formation indicates further weakness ahead. The market needs to close first below 1.38 before anything else.

The GBP/USD pair failed found strong support at the 1.38 area in the last couple of weeks. It keeps trying to break lower but fails every time.

However, the bounces are shallow, and the price action resembles a contracting triangle that could break either way. The bias remains bearish because the market failed at the 1.42 area twice, indicating a possible double top formation.

The economic data out of the United Kingdom this week showed an improvement in the labor market. Claimant Count Change decreased more than expected in June, indicating that more people return to their jobs or new jobs are being created. Yet, the British pound failed to capitalize on the positive data from the jobs market, as seen in the chart below.

Out of the United States, Fed Chair Powell’s semiannual testimony this week emphasized the ongoing need for accommodative measures. Despite the fact that inflation is running hot in the United States, up 5.4% YoY, the Fed is not worried about it and said that it is transitory. Only a change in inflation expectations will warrant a move from the Fed.

Later in the North American session, the retail sales for the month of June are expected to decline -0.4% the month. Any surprise there will trigger significant reactions on the US dollar pairs.

GBP/USD Technical Analysis

The technical picture looks bearish, providing the market does not bounce above 1.40. A possible double top formation indicates further weakness, but first, traders might want to wait for the market to close below 1.38 on a daily basis.

Bears may want to go short on such a move and place a stop-loss order at 1.3950. For the take profit, traders may use the double top’s measured move, or a risk-reward ratio bigger than 1:2. Booking partial profits should be considered, giving slow summer trading conditions.