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GBP/USD Technical Analysis: Rate Cut Waiting for August, Let it Rip for Now

GBP/USD Technical Analysis: Rate Cut Waiting for August, Let it Rip for Now

James Stanley, Senior Strategist

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Talking Points:

In our last article, we looked at the extension in the down-trend in the British Pound as traders began to factor-in a higher probability of a rate cut from the Bank of England in the coming months. And this wasn’t an unfounded expectation, as the head of the BOE has even told markets that a rate cut could be in the cards this summer in order to proactively offset risks emanating from Brexit.

The odd part about price action around this theme is that until Mr. Carney began talking up a rate cut on the Wednesday following the Brexit referendum, Sterling had begun to recover it’s post-Brexit losses. But as soon as Mark Carney began talking up the prospect of a rate cut, that down-trend in GBP came right back-in to markets and GBP/USD sank to fresh +30-year lows; even penetrating the vaulted 1.3000 psychological level on the pair. We had discussed the prospect of rate cuts from the Bank of England in last week’s Fundamental Forecast; and given that August brings another Super Thursday in which the bank will also release inflation projections, it made sense that the bank may wait to make a move on rates.

But this doesn’t necessarily spell for a bullish backdrop in the Pound. If anything, its just slightly ‘less bearish’ in the near-term as price action has seen GBP/USD get pushed to significant new lows, and the BOE might be merely waiting to cut rates so that they can accompany that move with relevant data to indicate that they’re actually cutting due to data rather than just fears of what the data may bring.

If we combine this with the fact that the US Dollar continues to range near-resistance with little chances of a near-term rate hike out of the Federal Reserve, this means that GBP could rip-higher for a bit longer before moving back into a down-trend. And again, this isn’t necessarily a ‘bullish’ factor as much as its simply ‘less bearish’ in the near-term.

So the bullish side of the pair might not be all that attractive with a fairly-probable rate cut coming in August; and the bearish side of the pair may not be attractive until we get price action finding resistance at a more well-tested level.

On the chart below are three such zones that traders can look for that next iteration of resistance in the Cable. The 1.3500 big figure is huge for a few reasons: This was the Financial Collapse low while also being a ‘major psychological level.’ This was also the lower swing-high just before Mark Carney started talking up rate cuts. Should resistance form in the zone around 1.3500, this could be an attractive jump-off level. And if the retracement can run a bit deeper, the same 1.3834 level that we discussed a few weeks ago could become an attractive zone of resistance, as this was the prior swing-low before the Brexit price action saw the pair plummet to fresh lows. And a bit deeper than that we have the prior swing-low at the 1.4000 psychological level, and this could funtion as a third zone of potential resistance should this retracement continue.

GBP/USD Technical Analysis: Rate Cut Waiting for August, Let it Rip for Now

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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