GBP:USD - Short term break out situation leading into 6.30pm CPI

The triangle formation Dave outlined in his post yesterday has morphed into a rectangle.

The UK CPI figures are due for release at 6.30 pm Sydney time. Michael Hewson's separate commentary post discusses the potential ramifications of tonight's release.

This rectangle creates a similar situation to the EUR:AUD triangle set up I discussed on the morning of the RBA release. The rectangle gives technical traders the basis of a strategy to set stop entry orders in case the news release results in a quick break out of the rectangle.

The first chart below is the longer term daily. This shows price is currently flirting with the support of the 200 day moving average. Friday's candle broke below it but the candle turned out to be a "hammer" which is a potential candlestick reversal indicator. The fast stochastic is also in the oversold zone but could easily break out of this from here.

GBP:USD - Daily. Source: CMC Tracker

The rectangle on the hourly chart below could provide either a buy or sell set up for swing traders depending on which way it breaks. However, all the features discussed on the longer term daily chart suggest that buying in the event of a break through the top of the channel may be the better risk: reward alternative.

GBP:USD - 1 Hour 22 May

The strategy outlined on the chart is one typical approach to rectangle breakouts. It places a stop entry just above the rectangle resistance.

The stop loss to quit the position if there is a false break is behind support inside the rectangle

The initial target projects the rectangle height from the break point.

A 2nd target for the 2nd half of the position at around 1.6086 represents the 61.8% retracement of the last major swing down and is close to a previous support level that may form new resistance. This is not shown on the chart above which is zoomed in to show a close view of the rectangle.