After retesting a high set in April 2022, the GBPUSD currency pair, also known as cable, opened the week on the back foot, although with a modest seven basis points decline. The Pound recently found favour, after gaining 1.98% last week, to close a second week in positive territory, with an impressive six consecutive days of gains.
The market has shunned the Greenback, primarily due to its weaker economic fundamental state, which has fostered expectations of the peak of monetary tightening in the U.S., and sparked the market’s search for alternative financial assets. U.S. inflation declined to 3% in June from 4%, revealing that the monetary tightening cycle, which led to 500 basis points of interest rate hikes from March 2022, is taking full effect. In addition, the labour market, a key driver of inflation, cooled, with Nonfarm Payrolls plunging to 209K from 306K.
Technical
The GBPUSD currency pair has been under the duress of optimistic traders that piled into the market to apply unparalleled upside pressure. With the pair moving swiftly higher, the 100-day moving average was left behind, validating the uptrend and strength of the upside momentum. Support and resistance were established at the 1.27536 and 1.31411 levels, respectively.
On the 4H chart, the pair moved sharply into overbought territory, based on the Relative Strength Index, and with a 65-week high retested, the market has begun to reverse.
If downside momentum picks up steam, the reversal could persist, with the Fibonacci Retracement levels likely offering potential levels of support. A breakdown below the 23.60% Fibonacci Retracement at 1.30497 could expose the pair to further downside pressures, leaving the 1.29474 level likely. In contrast, if downside momentum dissipates with declining volumes, the uptrend could recommence, with the 1.31411 level a likely point of interest to optimistic traders.
Summary
At 8.7%, U.K. inflation is still well above the desired 2% level. The Bank of England (BOE) will probably be under pressure to keep tightening its monetary policy to moderate its inflationary drivers. Higher yields will likely support the Pound; thus, a policy divergence between the BOE and Federal Reserve, which is considerably closer to its inflation target, might boost the GBPUSD even more.
Sources: Reuters, TradingView
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