The pound has been performing quite well over the past several weeks, despite the detrimental GDP numbers for the second quarter, protracted Brexit woes, and the persisting threat of a second coronavirus wave. Even still, the GBPCAD pair established a minor bearish correction over the last couple of weeks, which could represent one of two things – either a temporary disruption in the development of a broader bullish trend or a decisive trend reversal.
The widely popular Elliott Wave Theory can be used to examine the behaviour of the price action, which would allude to the next most likely direction for the pair. As it is about to be seen below, this minor correction appears to be taking the role of a retracement leg in a bullish 1-5 impulse wave pattern, which is inlined with the first proposition.
Consequently, the current market setup is suitable for the implementation of trend continuation trading strategies. In other words, today's analysis reviews the possibilities for the execution of long orders at the dip of this latest correction, in anticipation for the continued development of the prevailing bullish trend further north.
This week, the most volatile day for the pair will be Friday when crucially important industry numbers are going to be released in the UK. Later that day, Statistics Canada Lis scheduled to publish its monthly Retail Sales survey. Improved Manufacturing and Services PMI data in Britain is expected to be reported, which would bolster the strength of the pound if the consensus forecasts are met. There are no definite projections of the likely Canadian Retail Sales reading.
At any rate, the underlying fundamentals seem favourable for the continuation of GBPCAD's hike further north. This assertion is congruent with the overall technical outlook, as it is about to be seen below, which is welcoming news for the market bulls looking to join the market at the dip of the current bearish correction.
The daily chart below demonstrates the beginning of the broader bullish trend. It was established from the Double bottom pattern (the area in blue), which typically entails the termination of a preceding bearish trend and the beginning of a new bullish one.
Shortly after the conclusion of the double bottom pattern, the price action started establishing a new 1-5 impulse wave pattern. Notice that the second impulse leg (2-3) could not break out above the area in green, which served the role of prominent resistance in the past – the price action failed to break out above it on three separate occasions in the past, which led to the establishment of the last downtrend. Hence, the second retracement leg (3-4) was developed.
This retracement leg encapsulates the current correction (as mentioned above), and today's analysis reviews the possibility for the establishment of a new hike from the bottom at point 4. In other words, the market looks ready to conclude the final developmental stage of the broader impulse wave pattern, which is the third impulse leg (4-5).
Three reasons are justifying these expectations in addition to the underlying fundamentals. Firstly, the ADX indicator has been threading above the 25-point benchmark since the 31st of July. This means that the market is already trending, which is a favourable condition for the further development of the bullish 1-5 impulse wave pattern.
Secondly, the price action established an Inverted Hammer candlestick, which (for the time being) marks the dip of the retracement leg. This particular type of candlesticks usually entails rising bullish sentiment in the market and is typically found at the bottom of a bearish trend/correction. The emergence of an inverted hammer at the bottom of point 4 is, therefore, congruent with the prevailing expectations for the continued appreciation of the price action.
Thirdly, the price action appears to have found support from the 50-day MA (in blue) and the 30-day MA (in red); and the latter continues to trade above the former, which is illustrative of robust bullish sentiment. The final impulse leg (4-5) would have to break out above the 61.8 per cent Fibonacci retracement level at 1.74738, which represents its first major obstacle, and also above the resistance area in green.
As can be seen on the 4H chart below, the underlying signals look less concise in the short-term. On the one hand, the Ichimoku Cloud indicator is already signalling rising bearish bias, which could prove to be a major obstacle for the further development of the uptrend. At present, the bearish cloud (in red) coincides with the 61.8 per cent Fibonacci retracement, which bolsters the strength of the resistance level there. Hence, the price action could struggle to break out above the two.
On the other hand, the Parabolic SAR indicator is already signalling exhaustion of the bearish correction, and the MACD has registered a bullish crossover between the two EMA's comprising the indicator.
The GBPCAD is likely to attempt breaking out above the 61.8 per cent Fibonacci, but if it fails to do so, then the price action could consolidate below the resistance. A rebound from the 1.74738 level could be followed by a new test of the support area near the dip at point 4 (the green area).
As regards the hourly chart below, the underlying outlook looks more prevailingly bullish. This time, the Ichimoku Cloud is demonstrating rising bullish bias, which is congruent with the main anticipations.
The price action has recently established another smaller Double bottom pattern, which, as was already established, signifies rising bullish sentiment. In contrast, the MACD indicator is for the time being tilted to the downside; however, the overall momentum continues to be mostly bullish.
Overall, if the latest (minor) bearish correction remains contained within the test area (in blue), another rebound can be expected to occur soon. Such a course of action would likely drive the price action further north.
The price of the GBPCAD pair currently finds itself advancing in a robust bullish trend, which is temporarily interrupted by a bearish correction. There is mounting evidence suggesting that this correction is coming to an end, which entails the likely continuation of the uptrend's development.
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