GBP/USD – Correction after strong rally? A more dovish BoE could push the pound lower.

The pound began to lose strength as inflation in England began to ease and fresh hawkish comments from the Fed strengthened the dollar and the prospect of interest rates rising above 5%. Both St. Louis President James Bullard and Cleveland Federal Reserve President Loretta Mester said a 50 basis point rate hike at the next FOMC meeting was likely.

 The Bank of England may become a little less aggressive when deciding on the future path of interest rates. UK growth stabilises, labor market remains strong, retail sales remain weak but slightly better than forecast, while core inflation moderates. The BoE may decide that UK interest rates are starting to work and will probably be careful not to tighten monetary policy too much.

Different views of the Fed and BoE will be the main driver of market action in the pound/dollar pair.

Technical Analysis

The pierced and retested ascending channel suggests the beginning of a new downtrend. For now, the price action shows hesitation and holds support 1.188 – 1.197, which may lead to tight trading around the current levels in the coming sessions. Today’s absence of the US from global markets will likely prevent a sharp move during today’s session. A break of the 1.188 – 1.197 support will trigger a sharper downward momentum, with the Sequential only in the middle of the bearish cycle supporting this scenario. This suggests that there is likely to be a break of the support soon and a test of the levels around the 50.0% Fibo, the 1.139 zone in the medium term.

The DeMarker Oscillator remains weak, just above Oversold territory, indicating weakness from buyers. There is likely to be another entry into the zone in an attempt to break the current support, which would intensify the downward movement.

Long-term banking expectations

Banks expect the pound to recover against the dollar, but in the current quarter, a flat movement is expected. This may coincide with the idea of a medium-term correction before a stronger recovery.

Medium-term banking expectations

Banks are still predicting slight growth in the current quarter, with the price currently sitting in the zone of most valuations (1.20). Since the price was already at the upper end of the forecast range, around 1.24, absorption is likely to follow, at the lows around 1.18 – 1.17 by the end of the quarter.

Short-term bank expectations

In the next 7 days, banks expect a wide range between 1.185 – 1.22. This suggests a slight rally, possibly to the area around the 65-period, before a descent to the 1.185 level.

Conclusion

Last week the fundamentals improved for the dollar and shortly before that it worsened for the pound. Because of the divergence in inflation and interest rate expectations. I expect the downtrend in the pound to continue in the medium term, at least until the dollar appreciates new expectations for higher interest rates. Expected stops on the fall of the pound are the support levels, 1.175 / 1.164 / 1/138.

Alternative scenario

A break above the 1.244 – 1.236 resistance will push the price back into the ascending channel, signaling a continuation of the uptrend. The stop loss zone is above 1.244 – 1.236 measured against the size of the margin account.