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Market update: Pound’s resilience masks broader fatigue


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GBP/USD has failed to extend gains despite strong UK CPI data and EUR/GBP could be ripe to break lower and GBP/JPY’s rally is losing steam for now.

 

original-size.webpSource: Bloomberg

 

 Manish Jaradi | DFX Strategist, Singapore | Publication date: Wednesday 23 August 2023 

The British pound has failed to extend gains against some of its peers following last week’s strong UK inflation data. It could be a sign that some broader fatigue may have started to take effect given the over 20% rise since late 2022.

Higher-than-expected UK core consumer price index (CPI) has sealed the case for a 25-basis-point hike by the Bank of England (BOE) next month. However, the pound has failed to benefit much from the repricing higher. Stretched speculative long pound positioning, overbought conditions, and the possibility that the tightening could be in the price explain the reduced sensitivity of the pound.

Furthermore, while inflation is well above BOE’s comfort range and wage growth remains solid, some of the forward-looking price and activity indicators point to downward momentum in underlying price pressures.

GBP/USD monthly chart

 

image1pound-s-resilience-masks-broader-fSource: TradingView

 

GBP/USD: Not out of the woods yet

On technical charts, GBP/USD has rebounded slightly from the tough converged cushion on the 89-day moving average, the lower edge of the Ichimoku cloud on the daily charts, and the end-June low of 1.2600 – a possibility highlighted in the previous update.

However, from a short-term perspective, the pair is not out of the woods yet – GBP/USD needs to crack above the end-July high of 1.3000 for the immediate bearish pressure to fade. Until then, the short-term bias remains sideways to down.

That’s because of fatigue emerging on higher timeframe charts. On the monthly charts, GBP/USD has run into a stiff barrier, including the 89-month moving average, the upper edge of the Ichimoku cloud, and a downtrend line from 2014. This month’s drop below the July low has raised the risk that the consolidation could extend a bit further.

To be fair, this doesn’t mean that the medium-term trend has turned bearish. Indeed, as the previous update pointed out, from a medium-term perspective, the rise in July to a multi-month high has confirmed the higher-tops-higher-bottom sequence since late 2022, leaving open the door for some medium-term gains.

Importantly, as pointed out late last year, a new peak this year could be unfolding into something more than just a corrective rebound, that is, it opens the door for a reversal of GBP/USD’s medium-term downtrend published October 3.

GBP/USD daily chart

 

image2pound-s-resilience-masks-broader-fSource: TradingView

EUR/GBP: renewed leg lower?

After a brief respite, EUR/GBP looks ripe for a renewed leg lower – a risk highlighted in the previous update. It is now testing a vital floor at the December low of 0.8550. A decisive break below could pave the way toward the August 2022 low of 0.8350.

EUR/GBP weekly chart

 

image3pound-s-resilience-masks-broader-fSource: TradingView

GBP/JPY: rally stalls at resistance

GBP/JPY’s rally has stalled at a crucial resistance on the upper edge of a rising pitchfork channel since early 2023. A negative divergence on the daily charts (rising price associated with declining 14-day Relative Strength Index) indicates that this year’s rally is losing steam.

Still, the cross needs to fall below immediate support at the July high of 184.00 for the upward pressure to fade temporarily. Only a break below the July low of 176.25 would puncture the broader uptrend.

GBP/JPY daily chart

 

image4pound-s-resilience-masks-broader-fSource: TradingView

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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