GBP/USD Struggles to Gain Downside Momentum After Failure at Key Resistance

GBP/USD gained early last week but sellers dominated a critical resistance area and the exchange rate pared some gains in the second half of the week.

There were important developments last week, and the reaction in the exchange rate points to underlying strength.

Throughout the week, several members of the Bank of England discussed their latest views on monetary policy. The predominant theme was that policymakers are looking at methods to ease further and are not dismissing unconventional measures such as negative interest rates.

This is in sharp contrast to the message after the BoE met earlier this month. At that time, only two of the seven voting members had wanted to increase the size of their bond-purchasing program.

Further, comments from BoE Governor Andrew Bailey, shortly after the last Bank meeting, indicated that he did not see negative rates as a priority. Last week he said he’s changed his views a bit towards taking rates below zero.

However, despite the more dovish tone from central bank members last week, the pound to dollar exchange rate still closed the week with a small gain.

This creates a notable diversion between what is expected in terms of monetary policy and how the exchange rate is reacting. For this reason, Sterling bears may want to take a cautious approach in the week ahead.

Technical Analysis

GBP/USD reversed last week after testing resistance at 1.2266. This level marks previous support that had held the exchange rate higher in late April and early May.

There is also resistance from the upper bound of a declining trend channel that originates from the high posted in late April. This channel is not shown in the chart above.

Over the near-term, a small trend channel has emerged and it encompasses price action from the high posted last week. The upper bound of this channel currently falls near the 1.2200 handle which is also considered to be a horizontal level.

This is a major resistance area for the session ahead. If the pair manages to cross above it, it might trigger a renewal in bullish momentum.

The downward momentum since the turn lower last week has not had much momentum behind it, and for that reason, it might be too early to call a near-term top in place for the pair.

Bottom Line

• Volatility has slowed to start the new week with traders on holiday in both the UK and the US.
• Downside momentum is lacking following a rejection of key resistance last week. Sterling bears should remain alert of any renewed signs of upward momentum.

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