GBP/USD bulls stepping back in to target higher highs, 1.4000 eyed

  • Market squaring net shorts in cable leading to prospects of higher highs to come. 
  • The market focus will now be leaning towards next week's BoE meeting. 

At the time of writing, GBP/USD is leaning on support from the bullish 10 EMA and prior resistance structure near 1.3960.

The price has rallied to 1.3981 on the day so far, its highest in over a month reached on the back of a fall in coronavirus cases in Britain and the dovish rhetoric from the Federal Reserve's chairman.

Yesterday, the markets sold the US dollar on Jerome Powell's dovish stance on rate lift-off following an initial bid on Fed’s more hawkish stance on tapering:

DXY 15-min and 4-hour charts

The downside in the greenback has continued since breaking key trendline support coupled with Powell's remark that rate increases were "a ways away".:

A break below 91.80 support opens risk to the June 25 low near 91.5250. 

With that being said, some “buy the rumour, sell the fact” could be what has caused the dollar to slide and analysts question whether it is sustainable considering the convergence between central banks. 

Importantly, tapering was mentioned in the official statement for the first time this cycle, with the Fed noting that there has been some progress made towards the goals laid out to justify tapering.

''This was a very hawkish surprise and we believe it moves the timeline for actual tapering up a bit,'' analysts at Brown Brothers Harriman (BBH) argued. 

There are calls for a tapering announcement ranging between as soon as next month, at the  August 26-28 Jackson Hole Symposium, or the September Fed meeting which would allow for an additional month of employment data. 

Either way, current consensus sees tapering in either the fourth quarter of 2021 or by early 2022 and in contrast and far ahead of other central banks. 

''Much will depend on the data but we believe that tapering and rate hikes both happen sooner than the market expects,'' the analysts at BBH said. ''This is because we remain very optimistic about the US economic outlook and see heightened inflation risks ahead.''

Eyes on the Bank of England

Meanwhile, as the markets digest the Fed over month end, which is making for some choppy price action in forex, to say the least, the focus for sterling traders will now be the Bank of England, (BoE). 

The Monetary Policy Committee will convene next week and the BoE is expected to keep its stimulus running at full speed.

There have been some policymakers breaking ranks to suggest that its nearly 900 billion pound ($1.2 trillion) QE programme might have to end early as inflation speeds up.

However, various high frequency and survey data are pointing to the risk that the pace of recovery in the UK economy could have started to slow. 

While the nation has been prised for its vaccination programme and how numbers of new cases have started to fall week on week, reports about workers unable to work due to isolation rules have reinforced concerns about the pace of growth. 

GBP positioning is key

However, positioning data is a factor. 

The market has been very short of sterling of late, in both spot and futures markets, which leaves the bears vulnerable to this current short squeeze continuing.

Speculators went net short on the pound for the first time since December 2020 in the week up to last Tuesday, CFTC data showed on Friday.

GBP/USD technical analysis

The price is leaning on the 10-EMA on the hourly time frame and consolidating around the 61.8% Fibonacci retracement of the prior hourly bullish impulse.

The support structure is holding up and given month-end squaring of GBP shorts, this could lead to higher highs for the rest of the day and the sessions to come. 1.4000 is eyed. 

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