GBPUSD 3-month momentum is Bearish
The pound is struggling again as the US dollar appreciates following on from an FOMC meeting which turned out to be more Hawkish than the markets were expecting.
Multiple FOMC members feel there will be a need for a rate hike in 2022 and it is almost a given that the Fed will raise twice in 2023, if we ignore Chair Powell and put some meaning in these dot plots.
Obviously, anything can happen within the next 2 years but for now, the markets are adjusting to the real possibility of a rate hike cycle now that the Fed has started to talk about it.
GBPUSD Forex Analysis
The UK is still dealing with variants of the COVID-19, currently ‘Delta’ is causing havoc, but the vaccines are doing a good job at protecting the most vulnerable that have had the required doses. Over 18’s are now being invited so that means those pesky students who like to party and gather for some traditional old school fun, may not be the super spreaders they were during last year’s flu season. The government does not want to be seen to drop the ball now that we have sacrificed so much.
This week we have the Bank of England who is unlikely to surprise the markets with a tightening or rate hike but as was seen with the post FOMC markets, it only takes a hint of policy change for the money managers to make their moves. On Wednesday we get the Markit PMI Flash readings which could move the market before the following day's BoE announcements and then on Friday we receive the consumer confidence data.
When we look at the GBPUSD and its current price level on a chart it is fair to say that we’re at the top of a major range that sellers have in the past deemed overvalued. March 2016, early 2018, and today could all be where sellers step back in and push the pound down. Or the pound may just succumb to the US dollars bull trend that could be starting. Today’s prices are lower than the start of March 2021, so the last 3 months have been no good for the pound and even though we took out last month’s highs, we have also now taken out May’s lows, and are on track for a massive monthly bearish engulfing candle. The only thing worse than that would be if we took out the lows of February 2021 and confirmed that the uptrend from April 202 was over
On a monthly chart, the stochastic indicator has been pretty good at highlighting the overbought, oversold areas as the ranges have been clearly defined. Add in a bit of price action and it has been in the past quite easy to trade a mean reversion. On a weekly chart, the price and stochastic indicator are showing bearish divergence, adding to the idea that we are going to see some lower prices in cable soon
Using the weekly closes, a rising trend line from 2020 to recent swing lows has been clearly broken with last week’s price action so a retracement of that up move is most likely. A 50% retracement would coincide with the 1.2900-1.2910, with 1.261 being the 61.8% Fibonacci retracement.
On the daily chart, the trending moves higher had made looking at the stochastic indicator not very useful, unless you were looking for confirmation of short-term peaks ready for a small pullback to buy the dip. Currently, the Stoch is oversold, and it could stay oversold for a longer period if the GBPUSD were to trend lower. But as it is, we should wait for a move out of this oversold zone and sell a rip or test of old support that becomes resistant.
The ActivTrades sentiment indicator is showing that the traders on the platform are more bullish than the bears, so a little bounce higher into Thursday's big BoE announcement may trap enough longs for the shorts to accelerate proceedings to the downside. Resistance will need to hold around 1.4100 or lower and targeting the last March lows which are a double bottom with the early April lows would be my first target to the downside.
I could only get bullish again if we were to break higher than the distribution zone at recent highs and then above 1.4252 on a breakout, retracement, and continuation trade.