GBP/USD Daily Forecast – Sterling Retreats to Major Support

GBP/USD started to look like it had some bullish potential last week after it bounced from a major support level, however, the pair quickly reversed course after retail sales in the UK fell short of expectations.

Two major drivers for GBP/USD over the past few weeks have been a stronger dollar and increasing expectations of a rate cut in the United Kingdom. These two combined tilt the risk to the downside for the exchange rate although the behavior of recent price action should not be ignored.

Specifically, GBP/USD has held relatively steady considering these two factors. While the pair has posted three consecutive weeks of losses, the decline in each of the three weeks has been minimal. This puts into question how much of a rate cut is already priced into the exchange rate.

Nevertheless, Sterling saw a broad-based sell off after Friday’s UK retail sales figures fell well below analyst expectations. The downward momentum signals more losses to come, although the same support level that held the pair higher last week has once again come into play.

Volatility might subside in the session ahead as banks in the US will be closed in observance of Martin Luther King Day.

Technical Analysis

The dollar index (DXY) has broken higher to trade at levels not seen in more than three weeks. At the same time, the index is approaching technical resistance that held it lower in late December.

The approach to resistance in DXY coincides with a test of major support in GBP/USD. The 1.2961 price point is in play and the exchange rate is seeing some buying pressure from it in the early day. This level was responsible for holding the pair lower from October until around early December.

This is an area where the pair could see a bit of a bounce, especially considering that the US session is not likely to have much volatility.

On the other hand, a technical break lower from here would be significant since the horizontal level at 1.2961 has been well-respected. In such a scenario, the next target lower falls at 1.2900.

Bottom Line

• GBP/USD has retreated to a major support level as the dollar index is nearing a major resistance level. The pair might see a recovery from here, although the risks are tilted to the downside.
• A break of 1.2961 support would be significant and we might see the pair rapidly falling to 1.2900 in such a scenario.