Mainly Buy at Lows Rather Than Pursuing Highs with Strong Short-term Momentum

Eva Chen

Forex

Central Bank

Economic

Summary:

The GBPUSD touched its highest level since Feb.14 during the Asian session on Monday. In the first half of the European session, the pair traded above the 1.2200 mark and remained under the influence of the price dynamics of the dollar.

BUY GBPUSD

EXP

EXPIRED

1.21400

Entry Price

1.24160

1.19040

1.33273 -0.00039 -0.03%

Pips

EXPIRED

1.19040

1.24012

Exit Price

1.21400

Entry Price

1.24160

Fundamentals

Widespread risk aversion (as portrayed by weaker equity markets) has pushed some safe-haven money into the dollar and posed resistance to the GBPUSD. Despite the emergency measures taken in the US and Europe to provide liquidity to troubled banks, investors remain concerned about the potential for risk contagion and a full-blown global banking crisis. This in turn continues to weigh on investor sentiment and favors traditional safe-haven assets, including the dollar.

Nonetheless, the continued decline in US Treasury yields, with the reduced likelihood of more aggressive Fed tightening, has dampened further gains for the dollar and continues to provide support for the GBPUSD. Investors now seem convinced that the Fed will soften its hawkish rhetoric, especially after the recent failures of Silicon Valley Bank and Signature Bank. This, along with the anti-risk flow, has led to a further sharp decline in US Treasury yields and could limit the dollar's gains.

As for the UK, the Bank of England (BOE) expects inflation, which is still in double digits, to fall sharply. However, the change is not visible in the economic data. As a result, we expect the pound to struggle.

BOE expects inflation to fall rapidly this year. However, so far, there is still a risk that inflation will rise. If inflation does persist more than the BOE expects, its rather moderate stance could further depress the pound. The pound may also continue to weaken next year as we expect the BOE to cut its key interest rate again given the weak economy and some decline in inflation.

BOE may raise interest rates by a modest 25 basis points on Thursday, but gains in the pound may be limited as the bank is likely to issue a cautious outlook.

While we expect the BOE to raise rates by 25 basis points, the probability is closer to 50%, as it is for other central banks in the current highly volatile environment. The market's implied probability of a rate hike currently stands at 57%, but a strong hint of a pause by BOE policymakers could prevent the pound from rising sharply.

Traders also seem reluctant to make big bets now and may prefer to stay on the sidelines until key central bank risk events emerge this week. The Federal Reserve will announce its decision at a two-day monetary policy meeting on Wednesday and is widely expected to raise rates by a smaller margin of 25 basis points amid deteriorating economic conditions. Following closely behind is Thursday's BOE meeting, which should provide some meaningful impetus for the GBPUSD and help determine the next directional move.

GBPUSD: Mainly Buy at Lows Rather Than Pursuing Highs with Strong Short-term Momentum_1

Technical Analysis

The GBPUSD is rising again above the 1.2200 level and is gaining some nice (short-term) momentum.

The pair has found solid support in the recent sharp decline and looks likely to extend gains through the 55 SMA at the 1.2132 level. It may continue to test major resistance in the 1.2290 - 1.2300 area in the short term, with a further rally to retest 1.2445 resistance.

If so, the three-wave retracement pattern from 1.2445 to 1.1801 may have been completed. For now, the outlook will remain cautiously bullish as long as the 1.2009 support level is held. It is recommended to buy at lows.

Trading Recommendations

Trade direction: Short

Entry price: 1.2140

Target price: 1.2416

Stop loss: 1.1904

Valid until 2023-04-03 23:55:00

Support: 1.2125, 1.2010, 1.1955

Resistance: 1.2270, 1.2310, 1.2398

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