The GBP/USD pair is trading at 1.3041, up 0.36% on Monday morning. From the GBP/USD daily chart, it is apparent that the current level of the cable is trading close to the September 23, 2016 level. At that point, the GBP was trading at 1.31207. The fact the the pound remains bullish against the greenback is remarkable given the extreme volatility that the UK economy is subject to. The 50-day moving average of the currency pair is at 1.289, and the 200-day moving average is 1.257 – both of which have been surpassed by the GBPs strong showing against the greenback in recent weeks.
Buying on the Dip – GBP/USD Pair Trending Bullish
The high recorded for this currency pair in 2017 was 1.31, marginally less than the prevailing rate. The strong gains in the GBP have been attributed to the mixed performance of the US economy vis-à-vis retail sales, inflation data and the Fed’s reaction. On Friday, currency traders hammered the USD, and the DXY (US Dollar Index) reached multi-month lows as a result. As at July 24, 2017, the DXY was trading at 93.73. This has broken below the previous 52-week low for the USD (formerly 94.08 on the low end and 103.82 on the high end).
The declines in the DXY are especially telling over the past 3 months, with a 6% downturn. Renowned Stern Options trading guru Montgomery Price explained that the GBP continues to enjoy strong technical support. The pullback towards the 1.29 level should not be confused with current trends which are driving the GBP to the low 1.30s. As far as technical indicators are concerned, it appears that slight ‘dips’ actually present as buying opportunities for the GBP. The current short-term weakness of the USD presents favourably for sterling traders.
How Fed Policy is Affecting the GBP/USD Pair
Currently, the Fed has adopted a go-slow approach to interest rates. The federal funds rate is 1.00% – 1.25%. The Fed expects the US economy to continue to expand at a moderate pace, although there is growing uncertainty about inflation and retail sales. The current unemployment rate in the US ticked up to 4.4%, from a previous reading of 4.3%, and inflation decreased from a previous reading of 1.9% to 1.6% in June. Additionally, the government Debt/GDP ratio increased from 101% to 106%.
The most concerning data comes from retail sales month on month and year on year. The June figures were reduced by 0.2% month on month after they declined by 0.1% month on month in May. Currency traders sold the USD and this drove up demand for the GBP.
Bank of England Assessing the Impact of June Inflation
The recent rally in the value of the GBP/USD pair is largely reflective of weakness in US economic fundamentals. From a technical perspective, currency traders are anticipating the trends to continue. The moving average convergence divergence (MACD) indicates a strong uptrend for this pair. The next technical target for the GBP/USD is 1.3175. Several important economic data releases by the Bank of England and others will influence the direction of trade for the GBP/USD.