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GBP/USD Technical Analysis: Strong Oversold Levels

The British pound lost notable gains against the dollar and fell against the euro, yen and franc following comments from the US central bank chief that suggested interest rates in the world’s largest economy would rise higher than previously expected.

Selling operations of the GBP/USD currency pair reached the support level of 1.1805, the lowest level for the currency pair in more than three months, and it settled around the level of 1.1840 at the time of writing the analysis.

In general, the US dollar rose against all currencies, US short-term bond yields rose, and stock indices fell after Federal Reserve Chairman Jerome Powell said that US interest rates are heading to levels “higher than expected.” Speaking to members of the US Congress during testimony before a regular committee, Powell said, “Recent economic data came out stronger than expected, indicating that the final level of interest rates is likely to be higher than previously expected.”

Interest rates have risen in the US and other global markets as investors price in higher rates from the Federal Reserve, which act as a drag on stocks. Meanwhile, the negative investor environment is weighing on “high beta” currencies such as the pound sterling which tends to suffer when investors act defensively.

But the developments also highlighted the growing chasm between the Bank of England’s interest rate outlook and those of the US Federal Reserve and European Central Bank, with the former likely to rise less than its larger rivals. Overall, the GBP/USD exchange rate fell by 1.30% in the minutes following Powell’s comments, pricing at 1.1870, its lowest level since January. The magnitude of the forex movements, when combined with Powell’s messages, suggests that the market could return to a USD bullish trend until such time as inflation and data turn south again. This indicates a greater downside potential for GBP/USD and GBP/EUR.

According to analysts, “Powell’s hawkish style has led to a rally in the US dollar as institutional investors have begun to allocate dollar funds to take advantage of the continued rise in interest rates. America’s battle against inflation is far from over, and with the Federal Reserve flexing its monetary muscles in response, the dollar has been the biggest beneficiary.”

Powell’s testimony follows a series of better-than-expected US economic data releases that suggest the Fed should do more to cool the economy and curb inflation. As a result, Powell said he is ready to increase the pace of rate hikes if necessary. In response to the testimony, Fed funds futures showed that investors are now seeking a 50 basis point hike for March, up from 25 basis points previously. In response, short-term US bond yields rose.

Prior to that, the US dollar fell during the latter part of 2022 and into 2023 as markets raised bets that the Federal Reserve was about to end its interest rate hike cycle. Meanwhile, the cost of money fell in the US as financial markets began pricing in interest rate cuts from mid-2023 onwards. However, this dynamic was reversed by stronger-than-expected economic data in February, all of which point to continued inflationary pressures. Powell also said, “If the aggregate data indicates that a faster tightening is warranted, then we would be prepared to increase the pace of rate hikes.”

  • Continuous pressure factors on the performance of the price of the GBP/USD currency pair warns of the possibility of moving prices to stronger psychological support levels, especially if it settles below the support level of 1.1800, as happened yesterday.
  • According to the performance on the daily chart below, a collapse to the vicinity of the support levels 1.1760 and 1.1600, respectively, is not ruled out.
  •  On the other hand, and over the same period of time, the bulls need to move towards the resistance level 1.2150, to change the current bearish outlook.

The pair’s recent losses moved the technical indicators towards strong oversold levels, but the continued momentum of the US dollar will not end the current trend anytime soon.

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