The GBP/USD currency pair has been on the defensive as of late, recently trading to its lowest level in ten weeks at 1.3280. The stubborn defense of the 1.3500 psychological level earlier this week on a wave of rejection candles triggered the latest selloff. Consequently, sellers are now forcing down toward the important 50-day Simple Moving Average (SMA), located at 1.3474. Each one of these movements has kicked off a new downtrend. As we can see, they expose the mounting downward pressure on Pound Sterling as the US Dollar is still strengthening.
Increasingly, the current market dynamics make action imperative. For GBP/USD to keep targeting the key confluence zone between 1.3475-1.3500, it would require the pair to repeatedly return to the 1.3400 level. If the duo is able to clear decisively above the 1.3474 level, it may open the door to the July 4 high at 1.3681. But with the continuation of this bearish sentiment, it’s proving to be no easy feat.
Market Trends and Technical Indicators
The recent chart of GBPUSD is a textbook example of a bearish trend, as emphasized by the significant move below the 50-day SMA. The 14-day Relative Strength Index (RSI) for GBP/USD is below the midline. Together, this indicates that the currency pair likely has further downside potential in the short term. On the downside, support for the pair doesn’t show up until the 1.3250 area. If it breaks below this level, it will almost certainly retest the August low of 1.3142.
Another important area of support lies at the 200-day SMA, which is now at 1.3173. This lack of upward movement could potentially serve as a cushion for prospective buyers as they try to reclaim authority over the market. If buyers can gain a significant foothold beyond the supply zone, they will face an obstacle. This resistance would be the ascending trendline, now converted to a blockade at 1.3562.
Recently, the downward pressure on GBP/USD can be explained by expectations for monetary policy. The market is responding to indications that the monetary policies of the Federal Reserve (Fed) and the Bank of England (BoE) may diverge significantly. As Catherine Mann noted, “the monetary policy must remain restrictive for longer to create an environment conducive to growth,” which reflects a cautious outlook regarding economic growth and inflation.
External Influences Affecting GBP/USD
External factors play an important role in guiding GBP/USD performance, such as geopolitical developments, trade updates, and overall market sentiment. Recent headlines from Japan about their new economic policies have sent ripples of surprise through financial markets. Reuters reported that “Sanae Takaichi won the Japanese ruling Liberal Democratic Party (LDP) leadership election over the last weekend, setting the country on course for more expansionary fiscal policy and complicating the task facing the Bank of Japan (BoJ).” Even if GBP/USD is not China’s direct target, such shifts in policy can have ripple effects on global currency markets.
Additionally, comments from Fed officials still serve as a key driver of market sentiment towards the US Dollar. As traders take these communications in, any cues on direction of future interest rates or overall economic outlook are likely to greatly alter GBP/USD’s path.
The Road Ahead for GBP/USD
As GBP/USD prepares for potential moves ahead, traders will be particularly focused on pivotal levels that may determine whether the pair rallies or continues lower. Topsides, traders will eye the 1.3600-1.3620 region as the next major topside hurdle. They’ll reach for this level if they see even the faintest glimmer of healing after a recent bottom. On the flip side, a sustained break back below 1.3250 likely paves the way for re-testing of late summer lows, with implications for risk sentiment.
Technical indicators bear out the bearish bias. Importantly, the 21-day SMA was able to close below the 50-day SMA on Thursday, forming a Bear Cross indicative of sellers likely staying on top in the short term.