GBP/USD Flattens After BOE-Induced Rally

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Key Talking Points:

  • GBP/USD bounces off support as BOE delights traders with a hawkish tone
  • US yields see the biggest rise since February as FOMC meeting suggests a hawkish shift

GBP/USD has flattened overnight after its strongest rally in a month on Thursday. The British currency has been under pressure recently as an energy crisis has caused a number of gas providers to go bankrupt, but the hawkish tone from the Bank of England sparked some optimism into the Pound pushing GBP/USD above recent resistance at 1.3720, with Dave Ramsden and Michael Saunders, two of the Monetary Policy Committee (MPC) members, voting for an early end to the pandemic stimulus.

GBP/USD Daily Chart

GBP/USD Flattens After BOE-Induced Rally

GBP/USD bears were able to consolidate momentum at the end of last week, helped by a risk-off mood in markets on the back of contagion fears from Evergrande’s possible bankruptcy. The pullback formed 6 daily candlesticks with lower lows, bringing the pair just points away from the 1.36 mark, an area which has offered strong support in the past. Sellers were just shy of reaching the 23.6% Fibonacci retracement from the February highs (1.4121), but it’s the third time since mid-July that the pair has come close to dropping below it, which is a sign of worry that next time may well see a definitive break lower.

On the Dollar side, the hawkish FOMC meeting caused US 10-year yields to rise to their highest level since July, the biggest rise since February when inflation concerns were at the forefront of market drivers. The US Dollar has been picking up on the back of this but has lagged against the British Pound, so we may see the bearish reversal consolidate once again as GBP/USD catches up to the latest USD positioning.

In the case that buyers are able to hold off the bearish momentum, GBP/USD faces an area (shaded in blue on the chart) where there has been a lot of price reversals in the past, which means possible resistance on and around the 1.38 mark.

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Retail trader data shows 63.58% of traders are net-long with the ratio of traders long to short at 1.75 to 1. The number of traders net-long is 22.87% lower than yesterday and 16.48% higher from last week, while the number of traders net-short is 28.14% higher than yesterday and 18.01% lower from last week.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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