GBP/USD is setting up for shot at the 1.40 area

  • GBP/USD bulls are seeking a test of the 1.4000s in a daily extension.
  • Bears are seeking a break of the current daily support for a run to the 1.3780s.
  • The focus is on the Bank of England and US Nonfarm Payrolls. 

GBP/USD is currently trading at 1.3910 and 0.20% higher on the day so far, supported by risk sentiment that has improved as positive corporate earnings continue to offset worries over China's pressure on the technology sector. 

The risk-on tone has pushed the USD lower against most G10 currencies, including the pound which has also been helped by recent falls in COVID-19 infections in Britain, optimism around Britain's lockdown easing and market anticipation of hawkish signals when the Bank of England meets on Thursday.

The pound has traded better-bid since England's so-called 'Freedom day' when most lockdown measures in England were dropped on July 19.

Cable rallied to as high as $1.3983 at the end of July and has held form mainly in the 1.39s since then, sliding to 1.3875 on Monday in an aftershock of Friday's bid in the US dollar.  

There are mixed perceptions of why the pound was able to run so strongly towards the end of the month, with some analysts putting it down to pent up demand for the pound and optimism in the vaccination of the nation. 

Others presumed that a mix of dollar profit-taking, a squeeze of speculators' net short positions on the pound and month-end flows were a major factor. 

In any case, feelings that the pandemic could be largely over by the Autumn, allowing the economy to strongly rebound in the second half of the year, coupled with a potentially hawkish Bank of England is going to be a support for the currency going forward. 

Meanwhile, a quiet data and events calendar will see market focus pivot to Thursday's BoE meeting and Friday's US employment data.

Federal Reserve chair, Jerome Powell, at last week's meeting put an emphasis on jobs creation and more so than on the possibility of higher inflation.

Therefore, Nonfarm Payrolls is a highly anticipated event at the end of this week and will likely determine the US dollar's fate for the first half of the month depending on the outcome.

Traders will mark up the greenback on strong US data that will encourage the Fed to taper later this year and drive the central bank to make an announcement of timings sooner than later.  

Analysts at Brown Brothers Harriman, who are bullish on the US dollar overall, argued that ''the US outlook remains strong and this will lead to outperformance of the economy and the dollar in H2.''

''While we remain positive on the dollar, we acknowledge that the rally is unlikely to resume in force until a more hawkish Fed narrative takes hold. ''

''Despite Powell’s dovish press conference, tapering still seems likely to come sooner rather than later.  Last week, Bullard took this stance.  This week, Bullard’s former colleague at the St. Louis Fed and current Governor Waller joined him by saying he could see a tapering announcement by September and commencement by October.  Waller said the delta variant shouldn’t "sideline" the economy but that this timeline is contingent on two more strong jobs reports.  He stressed that “We should go early and fast, in order to make sure we’re in a position to hike rates in 2022, if we have to,'''' the analysts noted.

''We think this is the first time for this cycle that any Fed official has called for a hike and it’s clear that Bullard and Waller (along with Kaplan and Evans) are forming a hawkish core at the FOMC.''

Meanwhile, as for the BoE, it may decide to take a leaf out of the Reserve Bank of Australia's book which delivered a hawkish surprise overnight.

In fact, the BoE is expected to be among the first of the world's main central banks to begin the process of stopping stimulus support.

The focus will be on the MPC (monetary policy committee) splits. If it's a 6-2 vote or 5-3, this could spur the market into a buying spree and support the pound.

Interest rate futures currently price in the BoE raising the benchmark Bank Rate to 0.25% from its current 0.1% by August 2022 according to BOEWATCH.

GBP/USD technical analysis

From a technical point of view, the downside is compelling on a break of the current support which would reveal the neckline of the W-formation:

However, so far, the bears are failing and this leaves the upside in focus from a daily perspective to target a break into the 1.4000s:

The price has corrected to the 38.2% Fibonacci retracement level which meets old resistance and therefore forms a layer of support needed for which the bulls can lean on and search for an optimal entry point.

In the 15-min chart below, we can see that the price is testing the confluence of the 50 and 200 EMAs at a 38.2% Fibo.

If this level holds, then there will be prospects of a bullish impulse to break resistance, an area from which bulls can start to look for a bullish structure from.

If the level breaks, then the 50% mean reversion or the confluence of the neckline of the W-formation and the 61.8% Fibo would be both areas of potential support and leaving an upside bias on the daily time frame still.  

In doing so, the 4-hour chart would have completed a bullish reverse head and shoulders as follows:

Bulls can use such a structure to buy from a break of the neckline which would be expected to act as support, somewhere in the region of 1.3920. 

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