GBP/USD Forecast: Dollar weakness is insufficient to break above downtrend resistance
- GBP/USD has been advancing as the dollar fails to benefit from higher US inflation.
- Responses to UK GDP and US Consumer Sentiment are set to rock markets.
- Friday’s four-hour chart is showing that cable is capped under downtrend resistance.
Keeping the faith in the Fed – investors have been shrugging off the jump in US inflation to 5% and trust the central bank to see through these bumps, seen as “transitory.” The headline Consumer Price Index leaped to the highest level since 2008, which would prompt a rate hike in normal times. However, these are abnormal times.
Increases in prices of air travel, used cars and apparel seem to reflect a temporary surge in demand rather than a long-term phenomenon. The Federal Reserve may hint that it would taper bond-buys sometime in the future, but not anytime soon. This conviction sends stocks higher and Treasury yields lower, with the latter dragging the dollar down.
On the other side of the pond, acrimony around Brexit prevails, as the UK and the EU remain at loggerheads over the implementation of the Northern Irish protocol. More importantly, the UK’s return to normal will likely be delayed for longer.
According to the British press, UK Prime Minister Boris Johnson is contemplating a four-week delay to “Freedom Day” – the last stage of removing restrictions that was scheduled to June 21. Earlier publications indicated only a two-week pushback. The reason is the rapid spread of the Delta COVID-19 variant, which is highly transmissible.
Holding the economy back is weighing on the pound, despite encouraging signs of that the Britain is already benefiting from its previous moves to reopen the economy. Output expanded by 2.3% in April, marginally lower than expected but undoubtedly a rapid clip.
Later in the day, the University of Michigan publishes its preliminary read of US Consumer Sentiment figures for June. A minor bounce is on the cards.
US Michigan Consumer Sentiment May Preview: Inflation becomes a problem
All in all, the US dollar may be down but not out, while sterling is suffering from various factors.
GBP/USD Technical Analysis
Pound/dollar is capped by an upward resistance line that has been accompanying it since early June. The series of lower highs may prove decisive in the next downward move. Other indicators are somewhat more upbeat – the pair has surpassed the 50 and 100 simple moving averages and momentum has flattened after dragging cable down.
All in all, this resistance line is tilting the risks to the downside.
Some support is at 1.4160, which is where the 100 SMA hits the price. It is followed by 1.4110 and 1.4080.
Resistance awaits at 1.42, which is where the downtrend resistance was formed, and it is followed by 1.4220 and 1.4250, the latter is the 2021 peak.