GBP/USD bulls head toward critical resistance as DXY sinks below 111.00

GBP/USD stays bid into the close of Wall Street near 1.1475 and tallies up over 1.7% in gains as the US dollar sinks below a key micro trendline and UK politics save the day for sterling bulls.

Investors have welcomed Rishi Sunak as the new UK prime minister where, in his first speech, he reiterated to place economic stability and confidence at the heart of the government's agenda. Generally, there has been bullish sentiment around his appointment, with the FTSE 100 and sterling both rallying on the news..It comes as a relief after the pound fell as low as 1.1100 vs the greenback on Friday and government borrowing costs rose amid fresh warnings about the UK economy.

Sunak, a former banker, is more moderate than Liz Truss and had criticized many of her policies, including the unfunded tax cuts that started this whole mess. Financial markets have steadied since the country U-turned on those policies. Nevertheless, there is a mountain to climb and GBP/USD remains on the front end of a bearish trendline, as illustrated below, as traders get set for a slew of central bank meetings that kick off this week with the Europen Central Bank, Bank of Canada, Bank of Japan and conclude next month with the Federal Reserve and Bank of England. Experts are mixed on the UK’s future and there are questions as to whether the UK may be forced to ask the IMF for a bailout.

Meanwhile, despite the appointment of Sunak,  the bar for a dovish pivot is high. UK bond yields have already fallen sharply and the UK can expect austerity, low growth and rising inflation as utility bills continue to increase, analysts at ANZ Bank argued. ''Markets are now pricing in only a 20% chance of a 100bp rate rise when the Bank of England meets next week but are fully priced for 75bps.''

GBP/USD technical analysis

The price is headed towards a key resistance line while the US dollar sinks:

The outcome of these moves will be dependent on the central bank meetings next month. However, the weekly M-formation is compelling in the DXY as price heads towards a critical layer of support that could result in a correction into the neckline near 112.00. In such a scenario, GBP will struggle to make much headway beyond the daily resistance line in the foreseeable future unless we see a sizeable and convincing break of the DXY weekly support.