GBP/USD Eyes Fresh Rally, Dollar Dips Further

Key Highlights

  • GBP/USD is holding gains above the 1.2000 support zone.
  • It is trading above a key bullish trend line with support near 1.1960 on the 4-hours chart.
  • Crude oil price declined heavily and tested the $74.20 support zone.
  • EUR/USD started a fresh increase and climbed above 1.0400.

GBP/USD Technical Analysis

The British Pound started a fresh increase above the 1.1800 resistance against the US Dollar. GBP/USD even cleared the 1.2000 resistance to move into a positive zone.

Looking at the 4-hours chart, the pair settled above the 1.2000 level, the 100 simple moving average (red, 4-hours) plus the 200 simple moving average (green, 4-hours).

It traded to a new multi-week high at 1.2153 before there was a minor downside correction. An initial support is near the 1.2000 level. The next major support is near the 1.1960 zone. There is also a key bullish trend line forming with support near 1.1960 on the same chart.

Any more losses might send the pair towards the 1.1850 support zone. On the upside, the pair might gain bullish momentum once it settles above the 1.2150 level.

In the stated case, GBP/USD may perhaps test the 1.2250 resistance. The next major resistance may perhaps be near 1.2380. Any more gains could set the pace for a move towards the 1.2500 resistance zone.

Looking at EUR/USD, the pair remained well bid above the 1.1300 level and might continue to rise towards the 1.1500 resistance zone.

Economic Releases

  • German Consumer Price Index for Nov 2022 (YoY) (Prelim) – Forecast +10.3%, versus +10.4% previous.
  • German Consumer Price Index for Nov 2022 (MoM) (Prelim) – Forecast -0.2%, versus +0.9% previous.
  • US Housing Price Index for Sep 2022 (MoM) – Forecast -0.7%, versus -0.7% previous.
  • Canadian Gross Domestic Product for Q3 2022 (Annualized) – Forecast +3.5%, versus 3.3% previous.

GBP/USD: What’s With All That?

Just two months ago, GBP/USD was trading at its lowest level EVER, reaching a low print of 1.03565.  Today, the pair is trading near 1.1950!  A lot has happened in the last 2 months to bring the pair from the brink of collapse to today’s levels.  Many attributed the selloff to Liz Truss, or at least to her “mini-budget”, which would have left a gaping hole in the budget deficit.  Although this may have been the straw that broke the camel’s back, GBP/USD had been moving lower for months before the late September selloff.  GBP/USD had formed a Year-to-Date high on February 22nd at 1.4250!  The pair had been moving lower as it became apparent that the US Federal Reserve had to begin raising rates quickly. The board finally decided that rising inflation wasn’t transitory. On April 22nd, the pair crashed through 1.3000 and by mid-June the pair was trading 1.2000.  Once at 1.2000, GBP/USD continued lower in an orderly channel until Wednesday, September 21st.  The pair closed at 1.1235, below the bottom trendline of the channel.  Why had it been moving lower since 1.4200?

Source: Tradingview, Stone X

While inflation was flying high in the US, the Fed stepped up its pace of race hikes to 50bps in April.  By mid-June, the Fed was hiking 75bps at a clip.  Meanwhile, Bank of England was only hiking rates by 25bps at a time, as it was particularly concerned about driving the British economy into a recession.  It wasn’t until its last rate hike on November 3rd that the BOE finally hiked by 75bps to bring the cost of borrowing to 3%.  GBP/USD was moving lower due to interest rate differentials.  When the “mini-budget” proposal was presented, liquidity dried up in bonds, causing GBP/USD to collapse.  However, despite previously not raising rates aggressively enough, the BOE did save the UK bond market, which helped the Pound recover.  Now, with inflation at 11.1% YoY in the UK, and “only” 7.7% YoY in the US, its anticipated that the UK will have to hike rates higher and longer than in the US. However, there is also Prime Minister Sunak’s autumn budget which the markets still need to deal with:  Increased taxes and lower spending.  This may help with the BOE’s prediction of a recession coming down the pike.

Source: Tradingview, Stone X

On daily timeframe, GBP/USD was on a mission to get to 1.2000.  The price rose in an ascending wedge formation and broke out above the top of the pattern.  Expectations are that price should break lower from an ascending wedge.  Will price continue lower from here?  Pullbacks are normal in an uptrend and a pullback to the 38.2% Fibonacci retracement level (at 1.1467) from the lows of September 26th to the highs of November 24th is not out of the question.  However, the pair must pass through support before that level.  The first support level is at the top trendline of the wedge near 1.1900.  If price breaks below there, the next level of support is at the top, downward sloping trendline from the long-term channel near 1.1650, then the bottom trendline of the wedge near 1.1550.  However, if price continues to move higher, resistance (previous highs) ahead of 1.3000 are 1.2293, 1.2660, and 1.2843.

So, if GBP/USD can move lower due to the Fed being more aggressive than the BOE, is the reverse true as well? Or is GBP/USD just having a bear market bounce?  Watch the key support levels to see if price holds.  If it does, then GBP/USD may be on its way towards 1.3000!

Crude Oil Started with Crash

Crude oil market started the new week with sales. A Brent barrel is falling to 81.40 USD.

The worst of the news comes from China. The Chinese are rebelling against tough anti-coronavirus measures and lockdowns imposed by the government due to many new cases of COVID-19. The situation generates points of uncertainty because it is yet unclear how the Chinese authorities will react and how it all ends.

The issue with the maximum price level for Russian oil also keeps the market nervous.

According to Baker Hughes, the number of active oil rigs in the US increased last week by 4, reaching 627.

On H4, Brent has completed a wave of decline to 81.05. Today a consolidation range may form around it. With an escape upwards, a correction link to 89.09 might form. Then a link of decline to 78.78 and even 78.25 becomes possible. Technically, this scenario is confirmed by the MACD. Its signal line is at the lows, preparing to grow to zero.

On H1, Brent has formed a consolidation range around 85.00. Today with an escape downwards, a local goal of the declining wave has been reached at 81.05. With an escape upwards, a pathway up to 85.00 will open (a test from below). Technically, this scenario is confirmed by the Stochastic oscillator. Its signal line is under 20, headed straight upwards. The indicator is expected to grow to 50.

USDJPY Oversold Near November’s Lows; Risks Remain

USDJPY paused its latest decline near November’s low of 137.66 before climbing back into the 138.00 territory on Monday.

The RSI and the stochastics on the four-hour chart are flagging oversold conditions, justifying the latest bullish correction in the price. However, the way higher could be rocky, as several obstacles remain intact.

The 20-period simple moving average (SMA) could postpone an extension to the 50-period SMA at 140.00. Above the latter, the pair may get congested within the 141.35–142.00 territory formed by two key constraining lines. If the bulls dominate, the next challenge could commence around 143.70, a break of which is required to drive the price up to the 200-period SMA at 145.00.

On the downside, a decisive close below the 137.66 trough may intensify selling pressures towards the 38.2% Fibonacci retracement of the September 2021– October 2022 uptrend at 135.57. Crossing below that base, the bears may take some rest around the 161.8% Fibonacci extension of the latest upleg at 134.83 before heading for the 134.00 number.

In brief, although downside pressures in USDJPY seem to be fading, the pair may remain vulnerable to bearish corrections unless it successfully crawls above 142.00.

Dollar Index: Bears Pressure Key Support Zone

The dollar’s sentiment weakened on Monday, pushing the index lower and signaling possible bearish continuation after a double-Doji (Thu/Fri).

Fresh bears cracked pivotal 200DMA (105.25) the upper boundary of key support zone at 105.25/104.96, defined by 200DMA, Nov 15 spike low and Fibo 38.2% of 89.15/114.72 uptrend, with sustained break here to signal further weakness of the greenback, already on track for strong monthly fall in November.

Bearish daily techs contribute to dollar-negative fundamentals as signals that Fed would soften its aggressive approach to policy tightening, weigh strongly.

Res: 106.43; 107.11; 107.88; 108.06.
Sup: 105.15; 104.96; 104.49; 103.40.

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