british pound Prediction: Bearish
- GBP/USD Soared above the top of the previous durable range
- Returned to 7-month high
- Note, however, that this is part of the “weak dollar” story.
Learn how to trade pounds/USD Using the free trader’s guide
Recommended by David Cottle
How to trade GBP/USD
The pound is set to start the new trading week at its highest level in more than seven months against the dollar, which has fallen sharply on hopes of a guaranteed interest rate cut. Federal Reserve Chairman Jerome Powell said the U.S. central bank is “not far off” from considering cutting borrowing costs that have ballooned since early 2022 to combat inflation.
The GBP/USD pair strengthened against the dollar along with other major currencies as the latest US labor market data showed a slight slowdown in wage growth and a slight rise in the unemployment rate. None of the U.S. actions last week brought forward expectations for rate cuts from June, the month currently favored by markets. But as those expectations have become a little more certain, the dollar has generally weakened.
The UK, on the other hand, is likely to have returned to uninspired growth after what appeared to be a shallow recession in the second half of last year. The country is facing the possibility of a new political leadership, with the ruling Conservative Party lagging far behind in opinion polls this year. Still, the pound has received some support from the UK’s spring budget, and markets appear ready to believe that a degree of fiscal discipline will need to be maintained no matter which party wins.
UK inflation is on the decline and the country is no longer such a worrying outlier. However, 4% per annum is still double the Bank of England’s target, and it must be overwhelmingly likely that US interest rates will be cut before, or much earlier than, domestic rates.
The US will likely dominate trading next week as official inflation, retail sales and consumer sentiment data are released.
But in the UK, monthly gross domestic product data will be released on Wednesday, followed by employment figures the day before.
Sterling looks a little too strong at the moment and may not fall as much next week, but some consolidation would not be surprising.
Recommended by David Cottle
Forex Trading News: Strategies
GBP/USD technical analysis
GBP/USD daily chart created using TradingView
GBP/USD has surged out of a broad and fairly elevated trading range that has suppressed trading since late November 2023. The pound appears to be capped for the time being by psychological resistance at 1.29, a level not seen since August last year. Interestingly, over the past few days of trading, GBP/USD has risen well above its downtrend since its 15-month peak in mid-July. Its trendline currently provides support at 1.27005.
Still, unsurprisingly, the pound is starting to look quite overbought, and it seems likely that some consolidation could occur, even if it only takes the pound back to its previous range. The upper end of that range is currently at 1.29148, which provides support fairly close to the market, and below that, the February 2nd intraday high of 1.27661 is likely to be the focus.
The market still looks very well supported by the first Fibonacci retracement of the rally from September 2022 lows to July highs. This is at 1.24970 and seems likely to thwart a bearish attack.
–Written by David Cottle of DailyFX
