GBP/USD Technical Analysis: Bullish Channel Formation

The GBP/USD is settling around the 1.3770 resistance level, its highest level in month. The pair is waiting for stronger stimuli to complete the bullish channel, reversing most of its losses that had pushed it to the 1.3411 lowest support level, its lowest of the year. This slump was due to an energy crisis in Britain that is disrupting the path of economic recovery from the effects of the epidemic, in addition to the increase in the gains of the US dollar from expectations of imminent tightening of monetary policy by the US Federal Reserve.

Despite the recent gains in the performance of the British pound, many analysts still believe that this is just a reprieve in an ongoing downtrend. The dollar fell against all of the major currencies over the past week, with the exception of the Japanese yen which is under great pressure. The US currency's declines come amid an improvement in global investor sentiment which has traditionally been seen as a headwind to both the yen and the dollar, which are considered countercyclical currencies. In addition, investors seem to have fully understood the story of the US rate hike: a rate hike in 2022 and a subsequent series of price hikes, leaving dollar bulls looking for the next catalyst.

Ulrich Lochtmann, Head of FX and Commodities Research at Commerzbank, said: “It is likely that even the most emotional FX trader has now discovered that the US Federal Reserve will soon begin to scale back its asset purchase programme. And the Fed has been clear enough on that in this regard. Positive surprises for the US dollar are unlikely to materialize.”

But an additional angle to the dollar's weakness is that it is squaring the position - or taking profit - which means that a pullback is a potential temporary phenomenon. Accordingly, Francesco Pesol, a Forex expert at ING says, “Except for the yen, all G10 currencies strengthened against the dollar this week. However, we believe this is mostly due to some profit taking in the US dollar, and we expect the US currency to return to its bullish trend soon.” “The dollar gave up some of its recent gains this week, but we are reluctant to see that as a sign that bullish sentiment on the US dollar is waning,” Bisol added. “It seems likely that the modest correction will be caused by some profit-taking from long dollar positions as the markets are now fully priced at the start of the Fed's policy tapering towards the end of the year and the first rally in September/November 2022.”

The latest data from the Commodity Futures Trading Commission (CFTC) shows how market participants are positioned in the currency markets, confirming that the bet on a dollar rally is close to 14% of open interest, the highest level since November 2019.

The dollar remains an important driver of Forex market trends, and much of the pound's weakness against the dollar since May has slipped into a broader dollar rally, according to a US Dollar Index chart that shows the dollar's performance against a bundle of currencies. Depending on whether the dollar's rally is over, or it's just taking a breather, it could be the final verdict as to whether the GBP/USD can rally on a more sustainable basis.

The prospect of higher interest rates in the US - and other global central banks - is expected to lead to tighter credit conditions that could dent investors' appetite. The demand for the US currency in the futures markets has increased recently, as evidenced by the widening of the swap spreads between currencies. These developments reflect a number of factors:

(1) the increasing advantage of the dollar against the Federal Reserve;

(2) Hedging flows of importers in countries such as Japan and the Eurozone facing rising energy costs

(3) Increased demand for US dollar financing until the end of the year as international borrowers attempt to secure more favorable conditions when renewing their foreign currency commitments.

Technical analysis of the pair

In the near term, and according to the performance on the hourly chart, it appears that the GBP/USD is trading within an ascending channel formation. The currency pair recently rose towards the overbought levels of the 14-hour RSI. Therefore, the bears will target potential pullback profits at around 1.3721 or lower at the 1.3688 support. On the other hand, the bulls are looking to extend the current rally towards the 1.3780 resistance or above to the 1.3811 resistance.

In the long term, and according to the performance on the daily chart, it appears that the GBP/USD currency pair is trading within a descending channel formation. However, the currency pair recently bounced off trend line support to rise towards the overbought levels of the 14-day RSI. Therefore, the bears will target long-term profits around the 1.3641 support or lower at the 1.3510 support. On the other hand, the bulls will look to take profits around the 1.3864 resistance or higher at the 1.3983 resistance.

GBP/USD

Christopher Lewis

Christopher Lewis has been trading Forex for several years. He writes about Forex for many online publications, including his own site, aptly named The Trader Guy.