The GBP/USD exchange rate has formed a three wave correction higher and has reached a critical turning point in the trend.
The Pound has recovered versus the Dollar, after the Chancellor of the Exchequer, Philip Hammond, said the government was discussing a variety of different approaches to negotiating Brexit, which did not just include a “Hard Brexit” but might involve softer options as well.
Included were suggestions that the Government would defend the the ability of UK firms to bring in skilled labour.
His comments led to a rise in UK financial markets and the pound as they raised hopes the UK might avoid a complete break from the single market as well as the EU.
“Hammond’s comments seem to support GBPUSD around the 1.23 level.
“We believe that, on balance, his comments that nothing is set in stone regarding Brexit, is more market-friendly than the “hard” Brexit rhetoric that has come from Number 10 in recent weeks,” said the head of research at City Index, Kathleen Brookes.
GBP/USD has reached 1.2273 at the time of writing on Thursday morning.
From a technical perspective, the exchange rate has formed an extremely long daily bar on flash-crash-Friday.
This was probably a sign of exhaustion and is also an extremely long ‘hammer’ candlestick, which is itself a very bullish sign:
Following that, we have now had a three-wave correction or A-B-C correction higher, leading the pair to reach a critical decision point for the trend.
Whilst this could still mean the downtrend could resume and push lower again, it also means that if the recovery extends a little higher, then that would be a strong sign the trend had changed and was now potentially bullish.
“GBP/USD over the last couple of days has seen a decent rally higher.
“While this is still indicated to be corrective only, should resistance at 1.2335 be overcome then this would trigger scope for further gains to the 1.2500 vicinity,” said Commerzbank’s Karen Jones, in a note on Thursday.