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GBP/USD Poised for Larger Recovery as RSI Flashes Buy Signal

GBP/USD Poised for Larger Recovery as RSI Flashes Buy Signal

David Song, Strategist

BRITISH POUND TALKING POINTS

The British Pound outperforms its major counterparts as U.K. Chancellor of the Exchequer Philip Hammond expects the Bank of England (BoC) to ‘gradually and carefully normalize interest rates over time,’ and GBP/USD may stage a larger recovery over the coming days as the Relative Strength Index (RSI) flashes a textbook buy signal, with the oscillator finally crossing back above 30.

Image of daily change for major currencies

GBP/USD POISED FOR LARGER RECOVERY AS RSI FLASHES TEXTBOOK BUY SIGNAL

Image of GBPUSD daily chart

Recent comments from Chancellor Hammond suggest the BoE will continue to normalize monetary policy this year as price growth stubbornly holds above the 2% target, and the Monetary Policy Committee (MPC) may ramp up its hawkish tone at the next meeting on June 21 as ‘an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon.’

Even though the economic docket remains fairly light for the week ahead, MPC members Silvana Tenreyro, Jon Cunliffe, Ian McCafferty and Sir David Ramsden are all scheduled to speak over the coming days, and the fresh comments may ultimately heighten the appeal of the British Pound should the BoE officials show a greater willingness to implement another 25bp rate-hike in 2018.

In turn, a batch of hawkish rhetoric may fuel a larger recovery in GBP/USD, with the exchange rate at risk of extending the rebound from the May-low (1.3205) as the near-term decline in pound-dollar fails to produce a test of the November-low (1.3039).

GBP/USD DAILY CHART

Image of GBPUSD daily chart
  • Near-term outlook for GBP/USD has perked up as the pair carves a string of higher highs, while the Relative Strength Index (RSI) pushes back above 30 after holding in oversold territory throughout May.
  • Break/close above 1.3370 (78.6% expansion) raises the risk for a move back towards 1.3440 (38.2% expansion) to 1.3460 (50% expansion).
  • Need a move above the stated region to bring the topside targets on the radar, with the next region of interest coming in around 1.3560 (50% expansion) followed by the Fibonacci overlap around 1.3690 (61.8% expansion) to 1.3700 (38.2% expansion).

For more in-depth analysis, check out the Q2 Forecast for the British Pound

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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