The GBP/USD currency pair, affectionately nicknamed “Cable” by forex traders, has been quite the rollercoaster ride recently. This drop is largely driven by a robust US dollar and heightened market risk aversion. In fact, this currency pair comprises around 11% of all foreign exchange transactions. It’s a market that is overly sensitive to key economic releases including the US Consumer Price Index (CPI), Producer Price Index (PPI), and Retail Sales reports.
During the last few sessions, GBP/USD sold off dramatically. In the process, investors dumped gold positions in a hurry to reallocate cash to cover losses in US technology stocks. This combination of factors has reintroduced a bearish technical stance for the pair. You can observe this in the current RSI and short/medium/long moving average state.
Economic Indicators Impacting GBP/USD
Just as recent economic data releases have driven GBP/USD in both directions, they will be key to determining the pair’s course in the future. The future of the US labor market looks to be weakening. Consequently, the odds of a Federal Reserve rate cut next month shot up to 69%. This possible change in monetary policy might be just the medicine the GBP needs right now, having faced numerous political and economic headwinds recently.
The recent US CPI, PPI, and Retail Sales reports have underscored the impacts that inflationary pressures are having on market sentiment. Traders are watching these indicators like a hawk, as they might shape the Fed’s decision-making in the weeks ahead.
“If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.” – Bank of England
The Bank of England (BoE) just moved to a dovish hold. As the recent Fed decision reflects, they could have raised interest rates — the inflationary boogeyman is still out there, after all. Huw Pill, an influential figure within the BoE, remarked, “An assessment of the BoE’s reaction to Covid-19” at a recent conference, highlighting the central bank’s cautious approach in navigating post-pandemic economic recovery.
Technical Analysis of GBP/USD
From a technical standpoint, the picture for GBP/USD looks more and more bearish, as the 14-day RSI has just reached below 36. This level suggests that the pair is oversold, but it shows the continued selling pressure on CAD. The 21-day Simple Moving Average (SMA) is approaching its SMA cross over a close below the crucial 200-day SMA. This advance would indicate a Bear Cross.
A Bear Cross is an important big picture signal for traders. Together, these point to an overall change in market sentiment and further warn that GBP/USD is set to keep falling. Institutional or otherwise, all market participants will be looking closely for this crossover as it may be a sign of an extended bearish trend.
As we can see on the current GBP/USD chart, it is failing around the old support-turned-resistance level at 1.3142. If the price breaks decisively above this level, it may open the door to additional bullish momentum. We could subsequently witness an advance toward the 50-day SMA resistance at 1.3393. If prolonged pressure gives way and drops below 1.3142, it may prompt further aggressive selling. It could result in a break of sub 1.30 support, a notable local low of April 11 at 1.2967.
Market Sentiment and Future Outlook
Given increasing uncertainties within both the UK and US economies, market sentiment surrounding GBP/USD continues to be wary. The relative strength of higher UK interest rates are still luring global investors in search of stable returns. This trend is bullish GBP, but unfortunate dynamics are clearly working against this bullish trend.
During the last few trading sessions, GBP/USD attempted to breach the important and long considered psychological barrier at 1.3000. Following that failure, it made a modest comeback. The next major resistance can be expected near to 1.3265 if the pair manage to clear above 1.3000 firmly.
While the BoE’s dovish hold decision might have left many traders unshaken, market conditions are as harried and jumpy as ever.
“An assessment of the BoE’s reaction to Covid-19” – Huw Pill
As traders navigate this landscape, they remain vigilant about upcoming economic data releases that might influence both central bank policies and currency valuations.