GBP/USD, BRITISH POUND – Fundamental & Technical Outlook:
- GBP/USD looks overbought from a multi-month perspective, just as it tests vital resistance.
- GBP/USD’s rally is showing signs of fatigue even as UK inflation fell less than expected last month.
- Which way for GBP/USD in the near term?
Recommended by Manish Jaradi
How to Trade GBP/USD
The British pound’s rally against the US dollar has stalled recently, and chances are that the consolidation could continue a while longer before it embarks on a new leg higher.
That’s because even though UK inflation earlier in the week showed price pressures remain stubbornly high, the near-term monetary policy dynamics for GBP and USD are broadly similar, the pound is overbought from a multi-month perspective, and there are signs of fatigue on technical charts. For further discussion see “British Pound Price Setup: GBP/USD Rally Due for a Minor Pause?”, published April 17.
GBP/USD 6-Month Change
Chart Created by Manish Jaradi Using Excel; Source Data: Bloomberg
UK core inflation failed to fall as expected last month, holding steady at 6.2% on-year, and surpassing estimates of 6.0%, while UK wage growth surprised on the upside in February. Headline inflation rose faster than expected at 10.1% on-year in February Vs the 9.8% expected, and not too far from the four-decade high of 11.1% hit in October. Investors are now fully pricing in a 25-basis point rate hike to 4.25% on May 11 and expect rates to peak at 5% by September.
GBP/USD Weekly Chart
Meanwhile, the market is pricing in around a 90% chance of one more quarter-point interest rate hike by the US Federal Reserve at its May 2-3 meeting before pausing. However, Fed officials continue to strike a hawkish tone – Cleveland Federal Reserve President Loretta Mester said on Thursday the Fed still has more interest rate increases ahead of it – suggesting that the bar for Fed rate cuts later this year is high while inflation stays above the US central bank’s 2% target.
GBP/USD Daily Chart
The pace of GBP/USD gains in recent months has been quite sharp – the six-month change is the highest at least since 2014. While the surge in momentum bodes well for the medium-term outlook, in the near-term chances are that the gains could slow or even reverse a bit, given the mean-reverting nature of the series (see the chart).
GBP/USD Daily Chart
Note: In the above colour-coded chart, Blue candles represent a Bullish phase. Red candles represent a Bearish phase. Grey candles serve as Consolidation phases (within a Bullish or a Bearish phase), but sometimes they tend to form at the end of a trend. Note: Candle colors are not predictive – they merely state what the current trend is. Indeed, the candle color can change in the next bar. False patterns can occur around the 200-period moving average, or around a support/resistance and/or in sideways/choppy market. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Users of the information do so at their own risk.
On technical charts, the broader trend is up. The colour-coded candlestick charts based on trend/momentum indicators show GBP/USD remains in a bullish phase on the daily charts. However, GBP/USD has been struggling to break above the top end of a sideways channel since the end of 2022 at about 1.2450.
GBP/USD 240-minute Chart
Most recently, a negative divergence (rising price associated with falling momentum) on the daily charts suggests GBP/USD’s rally is losing steam. The pair could consolidate sideways or retreat a bit in the near term. On the 4-hourly charts, there is immediate support at the April 10 low of 1.2345. Any break below would trigger a minor double top (this month’s highs), opening the way toward 1.2200.
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— Written by Manish Jaradi, Strategist for DailyFX.com
— Contact and follow Jaradi on Twitter: @JaradiManish