GBP/USD Forecast: Overbought and ready to correct after the bullish wedge breakout

GBP/USD has surged after the second upbeat figure cast doubts about an imminent rate cut.
Parliament approval of Brexit, the coronavirus outbreak and further BOE speculation is eyed.
Thursday's four-hour chart is pointing to overbought conditions after the wedge breakout.

Yohay Elam FXStreet

The Bank of England may back away from the brink of cutting rates – that is some investors' impression after another positive UK economic figure sent sterling shooting higher. However, there is still one more critical publication awaiting the pound.

The Confederation of British Industry's Industrial Trends Survey – usually ignored by markets – beat expectations in and scored -22 points in January, the best since August 2019. That, alongside better-than-expected jobs figures published on Tuesday, triggered a massive rally in the pound.

GBP/USD hit a high of 1.3154 before consolidating its gains as bond markets began pricing out the chances of a rate cut in the BOE's upcoming January 30 meeting. Expectations for a rate cut had risen after weak inflation, retail sales, and Gross Domestic Product figures published last week – as well as dovish comments from members of the BOE.

Will the BOE cut or now or wait? The final word belongs to Friday's Purchasing Managers' Indexes from Makit. The preliminary statistics for January are forecast to show a bump in both the manufacturing and services sectors.

See PMIs preview: Cementing the BOE rate cut? Five GBP/USD scenarios

Beyond the BOE

The House of Lords gave its final seal of approval to the Withdrawal Bill, allowing the UK to leave the EU on January 31. Prime Minister Boris Johnson may celebrate getting Brexit done, but the road to a new trade deal – after the transition period expires at year-end – is still long. Any headlines related to future EU-UK relations may move the pound.

The coronavirus outbreak in China and other countries dominating headlines in broader markets, keeping the safe-haven US dollar bid. Authorities in the world's second-largest economy have shut down transport links to Wuhan, where the SARS-like virus originated from, a step seen as drastic. Additional headlines related to the disease may move markets.

Overall, speculation over the BOE, Brexit, and the coronavirus are set to move pound/dollar.

GBP/USD Technical Analysis

Pound/dollar has broken out of the wedge, or triangle, which has contained its price action since December. On its way up, the pair also surged above the 50, 100, and 200 Simple Moving Averages on the four-hour chart and momentum turned positive. However, the move may have gone too far. The Relative Strength Index is close to 70 – flirting with overbought conditions. This implies a correction.

Support awaits at 1.3120, the daily low, followed by 1.3080, which was a swing high earlier this week. NExt, 1.3135, 1.3110, and 1.2955 await the pair.

Resistance is at 1.3154, Thursday's peak, followed by 1.3210, a high point in early January. 1.3285, seen around Christmas, is next.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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