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GBP/USD Rate Forecast: Rebound Mired by Downward Trending Channel

GBP/USD Rate Forecast: Rebound Mired by Downward Trending Channel

2018-09-05 15:00:00
David Song, Strategist

British Pound Talking Points

GBP/USD has filled the gap from earlier this week, with the exchange rate snapping the recent series of lower highs & lows, but the broader outlook warns of a further decline as pound-dollar continues to track the downward trending channel from earlier this year.

Image of daily change for major currencies

GBP/USD Rate Forecast: Rebound Mired by Downward Trending Channel

Image of daily change for gbpusd

The limited reaction to the better-than-expected U.K. Services Purchasing Manager Index (PMI) keeps GBP/USD susceptible to further losses, and the uncertainty surrounding the fate of Bank of England (BoE) Governor Mark Carney may continue to rattle the British Pound as U.K. lawmakers mull extending the central bank head’s tenure.

Image of boe rate decision

It seems as Governor Carney intends to lead the BoE through the Brexit process even though his term is set to expire at the end of June 2019, and the recent breakthrough with the European Union (EU) may encourage the central bank to prepare U.K. households and businesses for higher borrowing-costs as ‘an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.’

With that said, the Monetary Policy Committee (MPC) may stick to its current course of implementing two rate-hikes per year as ‘any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent,’ but it seems as though the BoE is in no rush to adopt a more aggressive approach in normalizing monetary policy as ‘the MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

Image of IG client sentiment

At the same time, the IG Client Sentiment Report still reflects a skew in retail sentiment as 65.0% of traders are net-long GBP/USD, with the ratio of traders long to short at 1.86 to 1. Keep in mind, the retail crowd has been net-long sinceApril 20 when GBP/USD traded near the 1.4050 regioneven though price has moved 8.1%lower since then.The number of traders net-long is unchanged from yesterday and 0.9% lower from last week, while the number of traders net-short is 1.1% higher than yesterday and 11.2% higher from last week.

The ongoing slant in retail positioning provides a contrarian view to crowd sentiment, with the broader outlook for GBP/USD still tilted to the downside as the exchange rate preserves the bearish formation from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

GBP/USD Daily Chart

Image of gbpusd daily chart
  • Keeping a close eye on the monthly opening range as GBP/USD snaps the recent string of lower highs & lows, with the near-term outlook capped by the 1.3030 (38.2% expansion) to 1.3090 (38.2% retracement) region.
  • The failed attempt to test the August-high (1.3145) may keep GBP/USD within the bearish structure, but need a close back below the 1.2750 (61.8% expansion) to 1.2800 (50% expansion) area to open up the 2018-low (1.2662), which sits just above the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2640 (23.6% retracement).
  • Break/close below the stated region the next downside target around 1.2550 (78.6% expansion), which sits beneath the June 2017-low (1.2589).

For more in-depth analysis, check out the Q3 Forecast for the British Pound

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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.