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Jignesh Davda

GBP/USD rose sharply higher earlier in the week on the back of a tumble in the dollar. However, sellers have stepped and capped gains for the currency pair as a technical resistance area offers an attractive entry point.

The exchange rate was weighed last week by growing speculation that the Bank of England will ease monetary policy further at their next meeting in June.

Comments from central bank members over the weekend and earlier this week indicate that policymakers are starting to look at unconventional measures with more urgency with the interest rate already near the zero bound.

While the easing expectations had put pressure on Sterling, a sharp fall in the dollar earlier this week has aided a recovery towards an important technical resistance area.

The pair, however, has only shown minimal selling pressure at this point. Even despite weak inflation data out of the UK today.

The UK consumer price index was reported to rise by 0.9% in the year to April, down from 1.5% in the year to March. The Office for National Statistics reported falling energy and fuel pump prices as the largest contributed to the downward price pressure.

The Bank of England at their last meeting communicated expectations for a decline in inflation but also expressed confidence that it would recover back towards their 2% target objective over time.

Technical Analysis

GBPUSD 4-Hour Chart

GBP/USD faces a confluence of resistance that stems from the upper bound of a declining trend channel as well as a horizontal level.

The trend channel has contained price action from the high posted near the start of the month. The horizontal level is considered important as it previously held the pair higher in late April and then again in early May.

The pair briefly spiked above the level in late trading yesterday, likely taking some stops with it. At this stage, the pair has fallen into a consolidation below the resistance area.

In the event the pair manages to break higher, there will likely be a further liquidation from bears which stands to keep the pair supported over the near-term.

The broader view, however, calls for more downside as the pair shows signs that it has topped after two earlier failures at the 200-day moving average near 1.2640.


Bottom Line

  • Sellers have contained the recovery in GBP/USD as a resistance confluence has come into play.
  • The reaction from here will tend to set the near-term tone for the pair.
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