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GBP/USD bears piling in at critical daily resistance

  • GBP/USD bears seeking a downside continuation from the 61.8% failure.
  • All eyes are on the Bank of England and the US data.

GBP/USD is trading a touch higher on a day where the pair has traded between a low of 1.3923 and 1.4001 as sterling gained for a third session against the dollar.

The focus has been on the US dollar as investors weigh the various Federal Reserve speakers this week that have appeared to be balanced in their rhetoric with regards to the prospects of tapering of asset purchases by the central banks.

The US central bank last week signalled higher rates in 2023 and the premise that ultra-loose Fed policy effectively guarantees trend USD depreciation was ruptured.

However, some Fed officials have back-peddled.

Yesterday, for instance, Federal Reserve Chair Jerome Powell said that the central bank won’t raise rates on fear of inflation.

He reiterated to Congress that rising inflation is likely temporary and showed no signs of being in a hurry to tighten monetary policy.

Therefore, the arguments for a broad-based, persistent USD rally are not yet compelling.

Meanwhile, with Fed aside, on Wednesday’s UK PMIs put the focus squarely back on data for the pound.

The preliminary reading of the IHS Markit/CIPS UK Composite Purchasing Managers’ Index (PMI) pointed to one of the strongest monthly improvements in business activity since 1998.

The reading of 61.7 was not far off May’s unprecedented 62.9. As for services, the sector slid 61.7 in June from 62.9 in May. 

BoE in focus

The encouraging data falls ahead of Thursday 24 June Bank of England meeting.

The central bank announces its latest decision at 12:00 BST and although analysts expect no changes to policy, a more optimistic economic assessment from the BoE could push sterling back towards 1.4000 and beyond a 50% mean reversion of the last bearish daily impulse.

An upbeat outlook, combined with the fact that UK inflation hit its highest in nearly two years will likely fan the flames of speculation that the Bank of England will hike rates in 2022, ahead of the Fed.  

Currency markets are fully pricing in a 30 basis point hike in rates by the BoE by December 2022.

As for COVID, Britain has delayed the final phase of its economy’s reopening by a month to July 19. 

Prime Minister Boris Johnson has enforced the restrictions and said that the Uk needs extra time to speed up the country’s vaccination programme.

This is a thorn in the side of the pound which has otherwise been among the top-performing ‘G10’ currencies this year on bets that Britain’s economy will reopen quicker than peers following the nations COVID-19 vaccination programme. About 80% of Britain’s adult population has received the first dose.

Counteracting the bad news, elsewhere, European Union member states have informally agreed to grant Britain a three-month extension to resolve a dispute over whether chilled meat products produced in mainland Britain can continue to be sold in British-ruled Northern Ireland.

GBP/USD technical analysis

The bears will be lining up for prospects of a downside continuation following the test and failure of the 61.8% Fibonacci retracement level of 1.4000 which is a historic resistance level.

With that being said the bear will be prudent to wait for a break of both the monthly dynamic and horizontal support below 1.3940:

GBP/USD bears piling in at critical daily resistance

A monthly close of 1.3780 or lower will be highly bearish and will have put a triple monthly top in place:

GBP/USD bears piling in at critical daily resistance

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