GBP/USD Price Analysis: Bulls turn cautious amid overbought RSI, downside potential seems limited
|- GBP/USD edges lower on Thursday amid the emergence of some USD buying.
- A slightly overbought RSI is seen holding back bulls from placing fresh bets.
- The technical setup suggests that the path of least resistance is to the upside.
The GBP/USD pair trades with a mild negative bias during the Asian session on Thursday, albeit lacks follow-through selling and remains well within the striking distance of the one-year peak touched the previous day. Spot prices currently hover around the 1.3000 psychological mark and seem poised to prolong the recent uptrend witnessed over the past three weeks or so.
A modest pickup in the US Treasury bond yields assists the US Dollar (USD) in recovering a part of the previous day's heavy losses to a nearly four-month low, which, in turn, is seen acting as a headwind for the GBP/USD pair. That said, growing acceptance that the Federal Reserve (Fed) will start the rate-cutting cycle in September, along with the underlying strong bullish tone across the global equity markets, might cap the upside for the safe-haven Greenback.
Meanwhile, data published on Wednesday showed that UK inflation rose slightly more than expected, coming in at a 2% YoY rate for June. This comes on the back of a better-than-expected GDP growth of 0.4% in May and dampens chances of an interest rate cut by the Bank of England (BoE) in August. This might continue to underpin the British Pound and further contribute to limiting the downside for the GBP/USD pair, warranting some caution for bearish traders.
From a technical perspective, the recent breakout through the previous YTD peak, around the 1.2895 region, was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions and makes it prudent to wait for some near-term consolidation or a modest pullback before the next leg up. Any meaningful slide, however, is likely to attract fresh buyers near the 1.2965 area and remain limited.
The latter is closely followed by the weekly low, around the 1.2940-1.2935 region touched on Tuesday, which if broken decisively could pave the way for a slide back towards the 1.2900 mark. The said handle should now act as a key pivotal point, below which the GBP/USD pair could extend the corrective decline towards intermediate support near the 1.2855 zone en route to the 1.2820-1.2815 region and the 1.2800 round-figure mark.
On the flip side, momentum beyond the YTD peak, around the 1.3045 area set on Wednesday, should allow bulls to reclaim the 1.3100 mark. The subsequent move up has the potential to lift the GBP/USD pair towards the 1.3140 region, or the July 2023 swing high.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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