GBPUSD poised for another rally or first we get a deeper pullback?

The USD got a boost across
the board on Monday as the US-China tariff relief was a much better than
expected news. The market started to look at the more hawkish scenario where we
get an average 10% global tariff rate and economic activity picks up on an
easing in growth fears and general uncertainty.

That led to a hawkish
repricing in interest rates expectations with the market now seeing 50 bps of
easing for the Fed by year-end compared to like 120 bps at the peak of the
fears in April. The short dollar trade was pretty overcrowded so the unwinding
in positioning gave the greenback even more strength.

As we repriced the interest
rates expectations, the USD started to lose ground against the major currencies
once again. We will likely need the market to price in an even less dovish path
for interest rates to give the greenback another boost. That could come from
economic data or hawkish Fed comments.

On the GBP side, there wasn’t much change in the fundamentals but the hawks are starting to get uncomfortable by the lack of meaningful progress on inflation, especially on the wage growth side. The market is pricing in 45 bps of easing by year end, which is roughly equal to two rate cuts every quarter.

On the daily chart, we can see that GBPUSD threatened a break below the key 1.32 handle on Monday, but eventually rallied back above it erasing the USD gains. If we get back to that level, we can expect the buyers to step in once again with a defined risk below it to position for a rally into new cycle highs. The sellers, on the other hand, will look for a break lower to extend the pullback into the major upward trendline.

On the 4 hour chart, we can see that we have a downward trendline defining the bearish structure on this timeframe. This consolidation has also formed what looks like a bullish flag but we will need a break above the trendline to confirm that. For now, the sellers will likely continue to lean on the downward trendline to push into new lows, while the buyers will wait for a break higher to increase the bullish bets into new cycle highs.

This article was written by Giuseppe Dellamotta at www.forexlive.com.