The Pound Sterling (GBP) finds a floor after dropping off a cliff against the US Dollar (USD) on Thursday, following the Bank of England (BoE) monetary policy meeting. GBP/USD is currently trading in the lower 1.25s, trading slightly higher after UK GDP data confirms the country has averted a feared recession.
The pair fell on Thursday after the Bank of England published its decision, and deepened its decline following BoE Chairman Andrew Bailey’s dovish opening comments. Although it recovered later in the press conference as Bailey moderated his tone, GBP/USD ended the day just above 1.2500, as a further factor – renewed banking crisis woes – took its toll.
From a technical perspective, GBP/USD is showing short-term bearish signs but overall remains in a long-term uptrend, advantaging long over short holders.
GBP/USD sells off to 1.2500 and shows signs it may extend lower, however, this does not change the broadly bullish long-term picture. The uptrend remains intact as long as the 1.2435 May lows hold, and thus still favors Pound Sterling longs over shorts, for now.
GBP/USD: Daily Chart
On Wednesday, the market formed a shooting star Japanese candlestick reversal pattern on GBP/USD, indicating the possibility of a short-term bearish reversal. The pattern gained confirmation after Thursday’s bearish close. The expectation is for more downside in the short-term, probably to support at the base of the rising channel/wedge, located at around 1.2475.
GBP/USD: Daily Chart
The Relative Strength Index (RSI) is falling sharply after showing mild bearish divergence between price at the May peaks and RSI. This is indicative of underlying weakness, and further suggests more short-term downside.
That said, given the overall trend is bullish, the GBP/USD exchange rate will probably recover and continue rallying. The May 2022 highs at 1.2665 provide the first resistance level, but once breached they open the way to the 100-week Simple Moving Average (SMA) situated at 1.2713, and finally at the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1.2758. All provide potential upside targets for the pair. Each level will need to be decisively breached to open the door to the next. Likewise for the bull trend to reverse, the 1.2435 lows will need to be decisively breached.
Decisive breaks are characterized by long daily candles that break through key resistance levels in question and close near their highs or lows of the day (depending on whether the break is bullish or bearish). Alternatively, three consecutive candles that break through the level can also be decisive. Such insignia provide confirmation that the break is not a ‘false break’ or bull/bear trap.
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which < href="https://fxssi.com/the-most-traded-currency-pairs">accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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