A setup taking shape in GBP/USD

Oil and the Pound

A week ago we posted some commentary that a breakdown in the August crude contract would coincide with a breakdown in the GBP/USD. I liked the GBP/USD because it was in the midst of a downtrend and was consolidating at a nice fib level. We watched oil continue to rise to a new high and our former breakout range was invalidated. Both charts are reposted here for reference. An important thing to note is that as oil rose we did not see the same kind of upward momentum on the GBP/USD. This indicated a backlog of bears on this currency and a potential trade. Setting up a trade on the GBP/USD to take advantage of a breakout was and is a good idea.

Source: Prophet.net

The retracements levels we looked at previously are still in force and we are looking for a retracement to the 1.76 range. More weakness in the oil market would easily push the bearish bias on the GBP/USD lower. With reduced risk from global players and mild demand increases in the US, we could see other oil sensitive currencies move as well. Along with the current price target I would estimate a stop above the consolidation near 1.85.

Wade Hansen and John Jagerson are writers about and active traders in the Forex. Their book, Profiting With Forex, published by McGraw Hill, will be released this July. Both authors also develop Forex education courses for INVESTools.com.