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GBP/USD Technical Analysis: Bearish Correction

The GBP/USD exchange rate rose before last weekend to the level of 1.2485. At the beginning of this week’s trading it moved in a narrow range between the support level 1.2413. The resistance level is 1.2472 and settled around the level of 1.2435 at the time of writing the analysis. The currency pair may try to rise more before the UK’s inflation figures will be released on Wednesday, which could ultimately be the difference between whether sterling rises towards 1.30 over the coming months, or falls towards 1.20 and below.

The pound rose alongside other currencies late in the European session on Friday when the dollar sold off broadly after Federal Reserve Chairman Jerome Powell suggested that US interest rates could remain unchanged next month for the first time since January. from last year.

“Until very recently, it was clear that further policy assertion would be needed,” he told the Thomas Lubach Research Conference. As policy has become more restrictive, the risks of doing too much versus doing too little has become more balanced, and our policy has been revised to reflect that,” and “So we haven’t made any decisions about the extent to which additional policy steadiness would be appropriate, but given how far we’ve come And, as you indicated, we can afford to look at evolving data and projections and make careful assessments.”

Overall, Friday’s comments undermined market prices that indicated little prospect of a US interest rate hike in June, and Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, appeared to endorse it this weekend. Where Kashkari told the Wall Street Journal that he also prefers to keep the federal funds rate at 5.25% in June to gauge the impact of the recent turmoil in the banking sector on the economy, and the increase by 5% since last March.

Insofar as the prospect of a more patient Fed continues to dampen US bond yields, it could be a headwind for the dollar and a tailwind for the pound, although the debt ceiling saga in Washington is a significant source of uncertainty about the potential direction of the greenback this week.

For GBP/USD and GBP more broadly, much of the short- and medium-term outlook hinges on Wednesday’s inflation data for April, and whether it confirms the decisive turn to the downside that economists are widely expecting. Consensus points to the possibility of a sharp drop from 10.1% to 8.3%, although some economists are forecasting steeper declines and, if they are right, there could be a risk of a surprise loss in the pan-GBPUSD rate on Wednesday.

It is almost certain that UK inflation fell sharply in April due to the large underlying effect of the 48% rise in energy prices in April. Some analysts believe that further downward pressure will come from fuel prices.

Both consensus and other forecasts suggest that inflation will fall faster than the BoE expects, suggesting downside risks to market expectations of a Bank rate hike from the current 4.5% over the coming months. While the pound sterling may fall on Wed if projections of future rate increases are revised away the Bank however there is an argument that it would benefit once the dust settles should inflation drop significantly as this would herald an eventual recovery in lost purchasing power.

  • If these exchange rates were discounted by inflation and the bank rate differential that would prevail for GBP/USD if British inflation fell as economists forecast on Wednesday, the implied “fair value” of the pound would be somewhere between 1.30 and 1.35.
  • The big risk for the pound is that inflation does not fall enough on Wednesday or in the coming months, leading to a continued erosion of purchasing power and possibly necessitating a more aggressive interest rate response from the Bank of England.

This week’s data and events could influence sentiment around the UK’s economic prospects and appetite for the pound. Other factors will also weigh in on GBP/USD in the meantime including the degree to which the dollar has benefited from uncertainty over the debt ceiling and price action in the Chinese renminbi.

According to the performance on the daily chart below, the GBP/USD price is in a downward correction range, and the bears’ control over the trend will strengthen if it moves towards the support levels 1.2350 and 1.2260, respectively. On the other hand, the resistance level at 1.2680 is important for a strong return of the bulls to the trend.

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