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Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.2800.
- Add a stop-loss at 1.2600.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.2678 and a take-profit at 1.2600.
- Add a stop-loss at 1.2750.
The GBP/USD moved sideways last week even after the strong UK inflation data and a bigger rate hike by the Bank of England (BoE) than expected. The pair was trading at 1.2722, a few points below the highest point this month.
BoE and Fed divergence
The Bank of England diverged from the Federal Reserve. In a statement last week, the bank decided to hike interest rates by 0.50%, a bigger increase than what most analysts were expecting. Economists polled by Bloomberg and Reuters had predicted a 0.25% increase.
The bank said that the rate hike was necessary since UK continues to face stubbornly high inflation. A day before the decision, data from the UK showed that the headline consumer inflation remained at 8.7% in May while core inflation rose to 7.1%.
These inflation figures were higher than expectations and the Bank of England’s target of 2.0%. Another report by S&P Global showed that far more companies in the services sector were raising prices than cutting them. 25% of the surveyed companies raised prices compared to 4% that slashed them.
On the positive side, there are signs that British consumers are still shopping. Data published on Friday revealed that retail sales rose by 0.3% in May after rising by 0.5% in the previous month. This increase was helped by bank holidays and the King’s coronation.
The Federal Reserve, on the other hand, decided to leave interest rates unchanged in its June meeting since US inflation is heading in the right direction. The key events to watch this week will be developments in Russia and the US consumer confidence data.
GBP/USD technical analysis
The GBP/USD has made a slow retreat after peaking at 1.2845 earlier this month. As it dropped, it retested the important support at 1.2678, which was the upper side of the cup and handle pattern. The Relative Strength Index (RSI) and the Stochastic Oscillators have moved to oversold levels.
Therefore, after forming a break and retest pattern, the pair will likely resume the bullish trend later this week. In most periods, a break and retest is usually a sign of a continuation. If this happens, the next level to watch will be at 1.2800.
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