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GBPUSD pauses as traders anticipate moves from the ECB and US fiscal policy

by Neville Hornsey
22 July 2021
in Forex
0
GBPUSD pauses as traders anticipate moves from the ECB and US fiscal policy

Photo by Jannik Selz.

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GBPUSD Technical Analysis

The ActivTrader sentiment indicator shows that currently the euro and pound is favoured over the US dollar, but the retail traders feel the euro has the upper hand over the pound.

With an extreme reading of 72% of traders bullish the EURUSD, I would usually be tempted to fade that, but with the ECB meeting today the markets could be irrational for longer.

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The GBPUSD and EURUSD both show that the pairs are at or around decent support, with the main difference being that the GBPUSD has taken the liquidity that would have been residing under the double bottom, in the form of retail traders stops. The overall momentum is still long term bullish the pair, so this liquidity grab could be the start of the next leg higher. The main problem is that price had to also dip below the daily 200 exponential moving average which is now acting as resistance. Plus, there is an area of balance above, with the 20 and 50 period ema’s descending through adding to the resistance that is likely to be found should price probe inside those levels.

The pound is reliant on the weakening of the US dollar to give the GBPUSD a boost through this resistance zone and we have seen signs that the US dollar bulls maybe exiting their positions.

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The DXY sold off sharply yesterday, and usually it is longs exiting first rather than shorts overwhelming them, that starts off a larger sell off. It should be noted that the momentum and price action of the US dollar index is bullish and while we trade within the rising channel, we could still see the previous swing high as the most obvious target. Rising channels usually break lower at some point, and maybe todays ECB meeting is the catalyst.

If the ECB can’t tip the dollar, then maybe it will be the infrastructure bill passing next week or whenever the Republicans and Democrats can come to an agreement. We nearly had one yesterday which could have been why the dollar weakened.

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The EURGBP tends to travel inversely to the GBPUSD, but it is currently in a major sideways range. Price action is bearish but finding support from the balance area formed in early 2020. A break lower on a more dovish ECB would be a good sign that the pound was appreciating against a major trading partner. Couple that with a falling dollar in the future and the GBPUSD could be making new highs very quickly.

Politically things are getting more charged against the European Union as the UK government says it may suspend part of Brexit deal. According to the Northern Ireland secretary, the UK wants to negotiate an overhaul of regulations governing the trade between Northern Ireland and the rest of the UK. News around the Northern Ireland protocol is making waves, with the EU saying this is non-negotiable and the UK saying it’s not workable, and certainly not set in stone.

UK borrowing rose £22bln as reported by the ONS yesterday and a wide range of inflation data including average weekly earnings have been beating expectations. In particular, the UK RPI rose 0.7% Month-over-Month in June exceeding estimates for a 0.3% increase.

Rising inflation, if it is steady, should indicate a growing economy, or one that is being well supported by the fiscal flows from the UK Treasury. But this morning Bank of England (BoE) Deputy Governor Ben Broadbent said the higher inflation the United Kingdom has been experiencing as it recovers from the coronavirus pandemic is likely “to subside at some point.”

The BoE sees rising commodity prices as stabilising next year and suggested the UK’s central bank should maintain its current policy. With regards to rising inflation the Deputy Governor said “So, while we know it’s going to go further over the next few months, I’m not convinced that the current inflation in retail goods prices should in and of itself mean higher inflation 18-24 months ahead, the horizon more relevant for monetary policy.”

Tags: BoEEURGBPEURUSDGBPUSDUS DOLLAR INDEX
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