Chart Of The Day: Sterling On Knife's Edge, Pounded By Conflicting Forces

The Bank of England meets today at noon local time, 7AM EDT, for its next policy decision. Expectations are that the UK central bank will keep interest rates at 0.10%.

However, that's not what investors will be focusing on, since it's already a foregone conclusion. Rather, they'll be paying close attention to the BOE's Monetary Policy Committee’s minutes regarding asset purchasing, particularly after after the Fed yesterday opened the door for trimming its own asset purchasing, possibly as early as November.

Still, there has been growing concern among money managers that the UK central bank may, in fact, raise rates, as spiking inflation could force policymakers' to make a move. The problem with increasing the cost of borrowing, however, is that the country has been beset by a supply-chain crisis, the surging cost of energy and an economy that isn't keeping up with escalating prices.

According to some hedge fund managers, however, raising rates in this environment will only further weigh on UK growth. The country's currency, the pound sterling, and its FTSE 100 equity benchmark, have been lagging since June. Now, institutional investors have also turned bearish on British assets, for the first time this year.

GBP/USD Daily

The conflation of economic woes and pessimistic expectations have driven the pound to a combination H&S top. The 50 DMA dropped below the 200 DMA triggering a Death Cross, as the price formed the right shoulder of the pattern, adding to the bearish view.

However, take a step back and a different picture emerges:

GBP/USD Weekly

The weekly chart, going back to 2018, provides a far broader view of the technical significance of the daily H&S top, showing that it is part of a return move of a far larger H&S bottom since 2018.

According to the principles of technical analysis, the longer ranging pattern is more significant. That's because it's expected to have far more interested parties, traders who have been investing along the way.

As well, observant analysts who have already noticed the pattern are likely to assign it great significance from a technical perspective.

All that being said, if the smaller H&S top does play out, and the price penetrates the massive H&S bottom, the fallout will likely quite dramatic. But whatever occurs, the current, 1.3600 level is on the edge of a knife.

Trading Strategies

Conservative traders should wait for the long-term trend to pick a clear direction—up or down—before risking a position. They would do well to wait for a close below 1.3500 before considering a short or for a close above 1.43 to go long, but only after the price successfully retests the support or resistance.

Moderate traders would also wait for the resolution of this conflict, but their filters need not be as steep as those of their more cautious peers. A close below 1.3575 may trigger a short, while a close above 1.40 could be an opportune time for a long position.

Aggressive traders could consider today’s rebound off the H&S top neckline as a signal that the GBP/USD is heading higher and jump in, provided they accept the added risk proportionate to the higher rewards they're aiming for, aided by a well-though out trading strategy.

Trade Sample - Long Position

• Entry: 1.3650
• Stop-Loss: 1.3600
• Risk: 50 pips
• Target: 1.3800
• Reward: 150 pips
• Risk:Reward Ratio: 1:3