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GBP/USD Forecast: More sterling gains? Three higher lows and improving market mood point up

  • GBP/USD has bounced off the lows as the dollar finally takes a breather. 
  • Flows out of the dollar could outweigh weak UK retail sales data.
  • Friday's four-hour chart shows a bullish pattern is emerging. 

Cable is at the 1.38 crossroad once again – will it rise or fall? There are forces pulling in both directions, but there are reasons to expect bulls will prevail.

On Thursday, the dollar attracted safe-haven flows that came as US stocks suffered another down day – for no fundamental reason. US Retail Sales figures showed an increase of 0.8% in August, far better than a drop that was expected. On the other hand, inflation is off the highs, as shown by Consumer Price Index figures and by more recent surveys.

That is the optimal scenario for corporates, which benefit from high demand and lower price pressures. It also implies the Federal Reserve may wait longer before tapering its bond-buying scheme. 

One explanation is that investors – and especially hedge funds – are positioning ahead of "quadruple witching Friday," a massive expiry of options due toward the end of the day.

There are other reasons to be worried, such as America's elevated level of covid cases, the woes of Chinese firm Evergrande, and ongoing supply issues. Nevertheless, stocks may return to their "buy the dip" instincts. 

On the other side of the pond, UK Retail Sales missed estimates and fell by 0.9% in August. However, contrary to the US, consumption is less central to the British economy. Moreover, the impact on markets from this publication is limited. 

Investors will also be watching the preliminary release of the University of Michigan's Consumer Sentiment Index for September. However, this indicator's gloomy read for August proved poorly correlated with the hard data – retail sales. 

US Michigan Consumer Sentiment: Markets will have to look hard for positive sign

Overall, there is room for the improving market mood to prevail and push the dollar lower. 

GBP/USD Technical Analysis

Pound/dollar has set three ascending low points at 1.3680, 1.3725 and 1.3780. This is a bullish pattern that implies further gains. While momentum on the four-hour chart is still to the downside, the currency pair has edged above the 100 and 200 Simple Moving Averages. 

The three levels mentioned above serve as support lines, and they are followed by 1.36. 

Looking up, resistance is at 1.3820, where the 50 SMA hits the price. Further above, the upside target is the quadruple top of 1.3895. 

See US Retail Sales: The August divorce

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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