GBP/USD Forecast: Why sterling could temporarily bounce, before the next dollar storm

How low can cable go? GBP/USD has hit a four-week low and is on course for a third consecutive day – with fear driving the dollar higher.  The trend may end – or at least undergo a correction.

Evergrande, China's second-largest real-estate company is in dire financial straits and has already missed several debt payments as it struggles with a mountain of some $300 billion in liabilities. Beijing's reluctance to bail the firm out spooks markets even more – as Evergrande's collapse could trigger "contagion" effects that could slow global demand and derail the recovery. China's holidays on Monday and Tuesday adds to the uncertainty.

Investors are also concerned about the Federal Reserve's decision, where the bank could signal when it begins withdrawing stimulus. The Fed buys $120 billion worth of bonds every month, and reducing this amount would bring rate hikes closer. However, contrary to the Chinese authorities, there is room for additional Fed support – especially after last week's softer inflation figures.

Sterling also faces a rate decision. The Bank of England is set to leave its policies unchanged on Thursday, but some members could vote for ending the bond-buying scheme and even mull rate hikes. Headline inflation shot above the BOE's 1-3% target last week. That should boost the pound. 

Britain begins vaccinating youngsters aged 12 to 15 against COVID-19 and also starts offering booster shots. UK cases remained elevated and these expansions could bring it down. Another positive factor for GBP/USD – as a downward driver to the dollar – is Pfizer's announcement that low doses of its jabs are efficient for children aged 5 to 11. 

Overall, there is room for the pair to bounce, but uncertainty ahead of the Fed and China's return to work – in relation with Evergrande – mean the bigger picture is still of a downtrend. 

GBP/USD Technical Analysis

The Relative Strength Index on the four-hour chart is well below 30 – reflecting oversold conditions. That indicates an upside correction is due. Other indicators such as momentum and Simple Moving Averages point lower. 

Some support awaits at 1.3570, the mid-August low. A more substantial cushion awaits at 1.3660, which is the daily low. It if followed by 1.36, a psychologically significant level and the lowest point in the summer. Further down, 1.35 awaits the pair.

Some resistance is at 1.3720, a swing low from mid-September. It is followed by 1.3765. 1.38 and 1.3855.