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16 Jan 2018

GBP/USD - Risk reversals rise, but resistance at 1.3836 could hold on Brexit concerns

  • GBP/USD risk reversals adopt a bullish bias.
  • Resistance at 1.3836 could hold on Brexit concerns and short-term overbought technical conditions.

The GBP/USD one-month 25 delta risk reversals gauge has turned positive courtesy of the sharp rise in the spot.

Cable caught a bid wave at 1.3458 (Jan. 11 low) and rose to a post-Brexit referendum high of 1.3820 yesterday. As of writing, the pair is trading just below 1.38 levels.

The risk reversals gauge rose to 0.075 yesterday from Friday's print of -0.15. The positive number indicates bullish bias (increased demand for GBP calls) and adds credence to the solid rally seen on the spot.

Still, a risk of a short-term pullback cannot be ruled out, given the RSI on the dailies and the 4-hour chart shows overbought conditions. Meanwhile, the 1-hour chart shows a bearish price-RSI divergence.

Also, Brexit concerns could play spoilsport. According to a draft seen by the Financial Times, the EU wants Britain to abide by stricter terms on immigration, external trade agreements, and fishing rights for nearly two years after it leaves the bloc. EU's tough stance has reportedly raised the stakes in negotiations over the coming weeks.

That said, the dips could be short-lived as the markets could continue pricing-in the possibility of faster monetary policy tightening in the UK.

GBP/USD Technical Levels

GBP/USD low at 1.3836 3 months before Brexit vote is potential resistance, says Reuters report. Bexit concerns and short-term overbought conditions may ensure the resistance remains intact. Reuters report adds, "a break of the 1.3836 low targets the 76.4 Fibo of post-Brexit fall @ 1.4189, while failure at 1.3836 would see a return to initial resistance at 1.3659/73."

FXStreet Chief Analyst Valeria Bednarik writes, "the pair is poised to extend its advance, given that in the 4 hours chart, it's developing well above a bullish 20 SMA, while the RSI indicator keeps heading higher despite being at 81. The Momentum eased modestly within extreme overbought readings, but with the price about to challenge its daily high, a relevant correction is out of the question for now. The immediate resistance is February 2016 low at 1.3835, while above this last, there's little in the way until the 1.4000 figure.

Support levels: 1.3765 1.3620 1.3580

Resistance levels: 1.3835 1.3860 1.3895

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