GBP/USD Technical Analysis: Downward Trend May Continue

The pound sterling suffered additional strong and sharp losses against the other major currencies after the recent comments from the governor of the Bank of England about the future of interest rate hikes. The losses of the GBP/USD currency pair extended towards the support level of 1.2445, its lowest in three months. It closed last week’s trades stable around the 1.2465 level. This is an important and unusual trading week ahead with the anticipation of American and British inflation figures.

For his part, the Governor of the Bank of England has suggested that the Bank is nearing the end of the monetary tightening cycle, adding that there will be a “very marked” drop in inflation by the end of the year. Andrew Bailey said during his questioning by MPs: “There was a period when it was clear that interest rates needed to rise in the future, and the question for us was how much and in what time frame. And “I think we are not at this stage anymore”. He added by saying: “We are much closer to the top of the cycle… based on the current evidence”.

Accordingly, his comments pushed the pound sterling to fall to its lowest level in three months, falling 0.6 percent to trade below $1.25, as markets bet the bank may not raise interest rates as much as previously thought. Markets are currently pricing in two more 25 basis point rate hikes, which would take the Bank Rate to a peak of 5.75 percent.

Bailey stressed, however, that his comments should not be taken as an indication of how he will vote at the next Monetary Policy Committee meeting in September. The confidence of the British central bank is increasing that the rise in interest rates helps to tame inflation. The country’s inflation rate dropped to 6.8 percent in July, after peaking at more than 11 percent last year.

While Bailey said inflation in August may see a slight increase due to higher fuel prices, he said it will continue to decline through the rest of the year. He added by saying “many of the indicators are now moving as we expect them to move and indicate that the drop in inflation will continue and as I have said several times, I think it will be completely noticeable by the end of this year.”

However, Bailey said the strength of wage bargaining had surprised the bank and he would be looking to see if wage increase demands eased going forward.

For his part, Swati Dhingra, who is another member of the monetary policy committee, said that there are “very promising signs” that inflation is decreasing. She pointed out that producer price inflation has decreased significantly and that “almost every element” in the consumer price index has become negative. And while interest rates are likely to peak, the Bank’s rate-setters have increasingly indicated that interest rates should be left higher for longer than markets expect.

Bailey also said that the decision on when to cut interest rates will be an “important judgment”.

• There is no change in my technical point of view on the performance of the GBP/USD currency pair as the general trend is still downward.
• It may remain in the trend range until the markets react to the announcement of the inflation readings for both the United States of America and Britain.
• Currently breaking the 1.2500 support level confirms the extent of the bear’s control over the trend.
• It is and moving towards the 1.2410 and 1.2300 support levels pushes the technical indicators towards strong selling saturation levels. You can buy from them without risk.

There will be no first break in the direction of the sterling/dollar pair without moving towards the 1.2750 resistance level as a first step and confirming the change in the general upward trend requires moving towards the 1.3000 psychological resistance level. Today’s economic notebook is free of the important and influential economic releases from the United States and Britain and there will be one event which is statements by the chief economist of the Bank of England.

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