British Pound (GBP) Technical Setup: GBP / USD Testing Channel Resistance
GBP / USD TECHNICAL FORECAST: bullish
- The expected UK key rates show a rapid rise in rates after November.
- GBP / USD rally in doubt after questionable forecasts.
- Sentiment favors the upside in the short term.
FUNDAMENTAL CONTEXT BOOK
Sterling has been one of the strongest major currencies against the US dollar recent spurred on by a hawkish Bank of England (BoE) as well as a slightly weaker greenback. The two countries have started a divergence in terms of their central bank policies, with the Fed only looking to start gradually reducing asset purchases while the BoE is already considering rate hikes as early as November 2021 (see graph below). below for comparison).
The SONIA implicit forward fixing shows market expectations for UK interest rates going forward. The curve indicates that the markets are forecasting a rapid succession of rate hikes from November 2021 to the end of 2022.
With inflation numbers beating the target, it looks like the BoE is not adjusting to the transitional camp, but financial markets are much more hawkish according to the chart above. Could this be premature and will the rally in the pound turn into a downward correction? middle term?
GBP / USD TECHNICAL ANALYSIS
GBP / USD daily chart
Graphic prepared by Warren Venketas, IG
The GBP / USD daily chart above shows that the pair has been trading within a channel formation (yellow) since mid-June 2021. Price action shows tough bulls resistance of the channel which could provide short term indications depending on whether we see a breakout or continuation within the channel.
The Relative Strength Index (RSI) is trading at its highest since May 2021, but there is still room for further upside before entering overbought territory. This could mean an extension of the current bullish move as the first rate hike looms, after which a drop in bullish momentum as markets eventually revise their extreme rate expectations.
A bullish Exponential Moving Average (EMA) the threat crossover (blue), where the 20-day EMA approaches the 50-day EMA. If this turned out, there would be more momentum behind the movement towards 1.3900.
Key resistance levels:
- Channel resistance (yellow)
Key levels of assistance:
IG CUSTOMER FEELING DATA SIGNIFICANT SHORT-TERM Bullish BIAS
Sentiment of IG customers Data (IGCS) shows that retail traders are currently significantly short of GBP / USD, with 54% of traders currently holding short positions (as of this writing). At DailyFX, we generally take a contrarian view of crowd sentiment, and the fact that traders are net short suggests new upward momentum on the index.
— Written by Warren Venketas for DailyFX.com
Contact and follow Warren on Twitter: @WVenketas