GBP/USD Faces Delicate Position Amidst Technical and Fundamental Divergence, creating uncertainty in the market. Last week, GBP/USD experienced a brief upside move, finding support and bouncing off the 1.2400 level. However, as the European session commenced, selling pressure returned, leading to a retest of the support level before gradually edging higher. At the time of writing, GBP/USD is trading at 1.2450.
The conflicting dynamics between technical indicators and fundamental factors are causing market participants to proceed with caution. Federal Reserve Chair Powell’s recent comments resulted in a dovish repricing of interest rate probabilities for June and beyond. The likelihood of a 25bps rate hike in June dropped from approximately 40% to 22%. This dovish shift in market expectations may work in favor of GBP/USD in the coming days, especially with the upcoming release of UK inflation data on Wednesday.
The UK inflation print holds considerable significance as it will provide insights into the Bank of England’s (BoE) future monetary policy decisions. There have been speculations about a substantial drop in inflation, primarily driven by energy prices. However, even with a significant decline, inflation rates would remain uncomfortably high, indicating the possibility of at least one more rate hike by the central bank. Therefore, market participants are eagerly awaiting the inflation data release, as it will shape the BoE’s stance in the upcoming meeting and beyond.
Powell’s Comments and UK Inflation Data Shape GBP/USD Outlook
Looking at the event risk for the day, the calendar appears relatively quiet, with Federal Reserve speakers taking the center stage. The tone of their rhetoric can significantly influence the trajectory of GBP/USD. A dovish stance by Fed policymakers could further strengthen the British pound, while a more hawkish tone could provide the US dollar with ammunition, potentially pushing GBP/USD below the critical 1.2400 handle.
In addition to the Fed’s communication, the ongoing US debt ceiling talks are another factor to watch. As discussions continue, any delays in reaching a resolution could lend support to the US dollar, thereby keeping GBP/USD below the psychological mark of 1.2500. Friday brought negative news as GOP negotiators reportedly walked out, citing claims of unreasonableness by the White House. The longer these talks prolong, the greater the downside risk for GBP/USD.
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Analyzing the technical outlook, GBP/USD’s daily timeframe reveals a threat of breaking the ascending channel observed last week. However, the subsequent recovery and close back inside the channel suggest a false breakout. This emphasizes the significance of the support level around 1.2400. The upcoming daily candle close is pivotal, as a close below the 50-day moving average (MA) could open the door for a retest of the 100-day MA around the 1.2275 level.
On the intraday front, GBP/USD exhibits potential for a retest of the 1.2500 handle. The bounce from 1.2400, along with higher highs and lows on smaller timeframes (15-minute chart), signals the presence of upward momentum. However, reaching the 1.2500 level may encounter significant selling pressure, particularly as the US open approaches. The ongoing debt ceiling negotiations pose a downside risk for GBP/USD and could impede a sustained break above the 1.2500 mark.
Key intraday levels to monitor include resistance levels at 1.2450, 1.2500, and 1.2550, while key support levels lie at 1.240
0 (50-day MA), 1.2342, and 1.2275 (100-day MA).
Conclusion
In conclusion, the GBP/USD currency pair finds itself at a critical juncture, with technical indicators and fundamental factors sending mixed signals. The dovish shift in market expectations following Powell’s comments could work in favor of GBP/USD, but the upcoming UK inflation data release will provide further clarity regarding the Bank of England’s monetary policy decisions. Additionally, the outcome of the US debt ceiling talks remains a significant risk factor. Traders and investors will closely monitor these developments as they navigate the market and position themselves accordingly.
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