GBP/USD at Risk of Retesting Buyers at $1.05 as Risk Aversion Bites

It is a quiet day on the economic calendar, with no UK economic indicators to provide the GBP/USD pair with a direction.

While there are no stats to consider, Bank of England Monetary Policy member speeches will continue to draw interest. MPC member Jon Cunliffe will speak later today. The markets will be looking for any comments vis-à-vis monetary policy to align with Huw Pill.

On Tuesday, the BoE Chief Economist Huw Pill talked of a significant policy response to the government’s tax cuts but added that the Bank will wait until the November meeting to deliver a policy response.

GBP/USD Price Action

At the time of writing, the Pound was down 0.73% to $1.06537. A mixed start to the day saw the Pound rise to an early high of $1.07405 before falling to a low of $1.06307.

The First Major Support Level (S1) at $1.0640 limited the downside early on.

Technical Indicators

The Pound needs to move through the $1.0739 pivot to target the First Major Resistance Level (R1) at $1.0831 and $1.09. However, with no economic indicators to shift sentiment, R1 would likely cap any upside.

In the case of an extended rally, the GBP/USD would likely test the Second Major Resistance Level (R2) at $1.0929 but come up short of $1.10. The Third Major Resistance Level (R3) sits at $1.1120.

The market focal point remains the Bank of England policy response to the UK Government’s fiscal measures. Following the market response to the mini-budget, the MPC also has a weak Pound to consider. As a net importer, the weaker Pound exasperates the inflation woes that have forced the BoE into action.

Failure to move through the pivot would see the Pound retest the First Major Support Level (S1) at $1.0640. In the case of another extended sell-off, the Pound would test the Second Major Support Level (S2) at $1.0548 and support at $1.05 before any recovery.

The Third Major Support Level (S3) sits at $1.0357.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The GBP/USD sits below the 50-day EMA, currently at $1.10517.

The 50-day slid back from the 100-day EMA, with the 100-day EMA falling back from the 200-day EMA, delivering bearish signals. A GBP/USD move through R1 ($1.0831) and R2 ($1.0929) would give the bulls a look at the 50-day EMA ($1.10517).

However, failure to move through the 50-day EMA would leave the Pound under pressure.

The US Session

It is a busy day ahead on the US economic calendar. Housing sector numbers are due out along with goods trade data. However, the stats are unlikely to influence the dollar or market risk sentiment.

Fed Chair Powell will be the key driver through the US session. Powell will deliver welcoming remarks at the 2022 Community Banking Research Conference.

Any comments relating to the economic outlook, inflation, and monetary policy will impact the global financial markets. FOMC members Bullard and Bowman will also speak today.

Monetary policy divergence and sentiment towards the global economic outlook support a DXY return to 115 near-term. The dynamic is unlikely to shift until a marked deterioration in US labor market conditions and a sharp slowdown in consumption.