Weekly Outlook on the GBP: Is GBP/USD ready for Upward Breakout?

GBP/USD, BRITISH POUND – Fundamental and technical outlook:

  • GBP/USD appears to be overbought on a multi-month view and is currently testing important resistance.
  • The GBP/USD rally is showing signs of fatigue, even though UK inflation fell less than expected last month.
  • Where is GBP/USD heading in the near term?

How to trade GBP/USD

The British pound’s recovery against the US dollar has stalled recently, and there is a good chance that the consolidation could continue for a while before a new uptrend takes hold.

For although UK inflation earlier in the week showed that price pressures remain stubbornly high, the short-term monetary dynamics for GBP and USD are broadly similar, the pound is overbought on a multi-month view, and there are signs of fatigue on the technical charts. For more information, see “Pound Price Setup: GBP/USD Rally Due for a Minor Pause?”, published on 17 April.

GBP/USD 6-Month Change chart

UK core inflation did not fall as expected last month but remained stable at 6.2% y-o-y, beating estimates of 6.0%, while UK wage growth surprised on the upside in February. Headline inflation rose faster than expected in February at 10.1% y-o-y (versus the expected 9.8%) and was not too far off the four-year high of 11.1% reached in October. Investors now firmly expect a 25-basis point rate hike to 4.25% on 11 May and expect rates to peak at 5% in September.

GBP/USD Weekly Chart

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Meanwhile, the market reckons there is a 90 per cent chance that the US Federal Reserve will raise interest rates by another quarter point at its 2-3 May meeting before pausing. Fed officials, however, continue to strike an aggressive tone – Cleveland Federal Reserve President Loretta Mester said on Thursday that the Fed still has more rate hikes ahead – suggesting that the bar is high for Fed rate cuts later this year as long as inflation remains above the Fed’s 2% target.

GBP/USD Daily Chart

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Chart by TradingView

The pace of GBP/USD gains has been quite strong in recent months – the six-month change is the highest since at least 2014. While the increase in momentum bodes well for the medium-term outlook, gains could slow or even reverse somewhat in the short term, as this is a mean-reverting series (see chart).

GBP/USD Daily Chart

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Chart in TradingView

Note: In the colour-coded chart above, blue candles represent a bullish phase. Red candles represent a bearish phase. Grey candles serve as consolidation phases (within a bullish or bearish phase), but sometimes they form at the end of a trend. Note: Candle colours are not predictive – they only indicate the current trend. In fact, the candle colour may change in the next bar. False patterns can occur around the 200-period moving average, around support/resistance and/or in sideways markets. The author does not guarantee the accuracy of the information. Past performance is not an indicator of future performance. Use the information at your own risk.

On the technical charts, the overriding trend is up. The color-coded candlestick charts based on trend/momentum indicators show that GBP/USD remains in an upward phase on the daily charts. However, GBP/USD has struggled to break above the upper end of a sideways channel at around 1.2450 since late 2022.

GBP/USD 240-minute Chart

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Chart in TradingView

The recent negative divergence (rising price combined with falling momentum) on the daily chart suggests that the GBP/USD recovery is losing steam. The pair could consolidate sideways or decline somewhat in the near term. On the 4-hour chart, the April 10 low at 1.2345 provides immediate support. A break below it would trigger a small double top (this month’s highs) and open the way towards 1.2200.

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