Having rallied strongly on Wednesday, cable is paring gains today but we are still seeing signs that the pair remains bullish.
The most obvious of these came following the US retail sales release, which along with the core reading was better than already high expectations. The previous reading for April was also revised higher.
This suggests the consumer is starting to spend some of that extra disposable income from higher wages and lower oil prices. This should start to filter through into higher inflation readings which could prompt the Federal Reserve to hike interest rates this year – an event that would typically be bullish for the dollar.
The initial reaction to this reading was just that, a rally in the dollar, but when it came up against its first key technical support area – recent resistance on a couple of occasions and previous support between 1.54 and 1.5450 – it rebounded higher.
What we’ve been left with on the four hour chart is something that resembles a tweezer bottom, a bullish reversal pattern.
That suggests to me there’s more upside to come in this pair and if yesterday’s highs can be broken, 1.56 looks the next clear resistance level.
I still think the pair could go beyond here and the first major test will be the 233-day simple moving average just below 1.57, but I will keep a close eye on the chart for any sign that this will not happen.
For example this could be a divergence between a divergence between an oscillator and price action combined with a reversal on the 4-hour chart.
If we fail to break above yesterday’s highs, it could be a warning sign of a bearish reversal, especially if accompanied by a hanging man candle. That would make tomorrow very interesting and important.
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Craig Erlam
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