GBP/USD bears stepping in at daily resistance, eyes on 1.3790s

At odds with risk sentiment, at the time of writing, GBP/USD is trading at 1.3892 and is some 0.5% higher on the day.

The pound rallied following a London fix surge around 1500 GMT that sent the bears packing from near the 1.38 level to a high of 1.3892.

Earlier in the day, the pound was hit on the equity selloff, led by Chinese technology stocks, sending it to as low as $1.3766 early in the European day. 

It is a rather obscure time in markets given month-end and the Federal Reserve meeting during the same week.

We can see less liquidity as traders try to second guess the Fed outcome while trying to position for the event and/or square books at the same time which can see sudden impulses of flow across dealing desks. 

As for positioning, according to the IG Sentiment and CFTC, the market is net short from both a spot and futures perspective (Specs turns bearish GBP for the first time since December) which may also explain the sudden burst to the upside as traders cover shorts and take profit ahead of the Fed and month-end. 

The Fed is too close to call

There will be no economic revisions or changes to the dot plot at the FOMC meeting this Wednesday so attention will be on the guidance of Chair Powell in the press conference. 

Changes will be far and few between compared to the testimony in Congress less than two weeks ago, but the delta variant risk is something that has been mounting since then.

Bets are ranging from a hawkish surprise to a hawkish hold among analysts, but the delta variant risk is the caveat. 

 The nuance of chair Jerome Powell tomorrow could decide the fate of the greenback. 

The current flattening of the US curve supports the view that inflation is transitory but, if Powell sounds the alarm bells too loudly over the delta variant, it takes a gloomier resonance if it is an assessment of economic growth losing momentum. This could weigh on the greenback heavily initially considering CFTC positioning data shows that investors are long USD vs G10 and EM-FX. 

However, on the flip side, a rise in risk-off impulses would also tend to favour the dollar.

''We expect a modestly hawkish hold, as the Fed is likely to acknowledge ongoing inflation risks and that it is continuing with its discussions of tapering,'' analysts at Brown Brothers Harriman said.

Key comments

''Tapering could be mentioned in the official statement, which would be a very hawkish surprise.''

''Because this is widely seen as a placeholder meeting, we think markets will be susceptible to surprises at either end of the hawk/dove spectrum.''

 ''We lean toward a hawkish surprise, in which case the dollar rally should continue.''  

Looking forward

From what happens after the Fed event, is anyone's guess considering this is too close to call.

With that being said, considering the overall net short positioning in markets, the path of least resistance could well be with the bulls for the near term.

However, besides the Fed, cable traders are also looking for direction from the Bank of England meeting next week.

BoE interest-rate setter Gertjan Vlieghe said earlier this week that the central bank should not scale back stimulus possibly until well into 2022. 

Vlieghe argues that the recent uptick in inflation is likely to be temporary and COVID-19 remains a threat to the economy.

Meanwhile, the Covid variant risks to the pound seemed to have subsided despite the opening of the economy.

Data on Monday showed new COVID-19 cases in Britain had fallen for five consecutive days which could unravel some pent up demand for the pound as well. 

GBP/USD technical analysis

However, from a technical point of view, cable is at a compelling level where it meets daily support.

In the background, there is a bearish W-formation to consider also:

M & W formations have a high completion rate. The theory is that the price will be drawn back into the neckline of the formation.

In the above scenario, the bearish outlook is even more convincing.

Considering the confluence of the 50-day EMA at resistance, with the 10-day EMA meeting the neckline of the formation as well as the golden ratio, (61.8% Fib), this makes for a compelling downside bias to the 1.3790s. 

First of all, the bears will need to get beyond the 21-day EMA's confluence with the 38.2% (1.3820's) and then the 50% (1.3807) mean-reversion level. 

In the meantime, however, the hourly chart's structure and forthcoming price action should not be ignored. 

The price is losing momentum at daily resistance so there is a focus on the downside. 

However, the 38.2% Fibo and the confluence of the 10-EMA as well as the old resistance structure, 16 July highs, could prove to be a firm area of support, 1.3860. 

If bulls commit to here, 1.3860, then there will be prospects of an upside continuation and a higher high could be on the cards prior to any significant selling in line with the prior analysis on the daily chart's W-formation.