Recovery move falters near bearish flag resistance, focus shifts to BoE

  • GBP/USD gained traction for the third consecutive session on Wednesday.
  • The post-FOMC USD short-covering move capped the pair near the 1.3000.
  • Thursday’s key focus will be on the latest BoE monetary policy decision.

The GBP/USD pair built on its recent strong recovery move from multi-week lows and gained some strong follow-through traction for the third consecutive session on Wednesday. As investors looked past the recent developments surrounding the Brexit saga, the British pound got a strong boost from reports that Britain offered tentative concessions on fisheries in trade talks with the European Union last week. On the economic data front, the headline UK CPI dropped sharply to 0.2% in August from 1% previous. The reading, however, was slightly better than consensus estimates pointing to a 0.1% rise and remained supportive.

The pair shot to fresh weekly tops, albeit struggled to capitalize on the move further beyond the key 1.3000 psychological mark and witnessed a modest pullback of around 35-40 pips. The US dollar got some respite after the Fed gave no indication of additional stimulus to shore up a battered US economy. Adding to this, the Fed also upgraded its economic outlook and projected a much shallower contraction in 2020. The unemployment rate forecasts were also revised lower through the horizon. The Fed’s upbeat assessment of the economic recovery prompted some USD short-covering move, which, in turn, kept a lid on any strong gains for the major.

Meanwhile, a turnaround in the global risk sentiment further drove some heaven flows towards the greenback and exerted some pressure on the major through the Asian session on Thursday. The pair eroded a part of the previous day’s positive move but managed to find decent support near the 1.2900 mark. The pair was last seen hovering just below mid-1.2900s as market participants now look forward to the latest BoE monetary policy decision. The UK central bank is not expected to change its policy setting and hence, the key focus will be on the accompanying statement. That said, the announcement is unlikely to be a major game-changer for the sterling, which remains at the mercy of the incoming Brexit-related headlines.

Short-term Technical Outlook

From a technical perspective, the pair stalled its recovery move near a resistance marked by the top end of a short-term ascending channel. Given the recent sharp fall, the mentioned channel constitutes the formation of a bearish flag pattern on short-term charts. The pair was last seen hovering near the trend-channel support, around the 1.2925-20 region, which if broken decisively will be seen as a fresh trigger for bearish traders.  The pair might then break below the 1.2900 mark and accelerate the downward trajectory further towards the 1.2840-35 horizontal support.

On the flip side, any meaningful positive move might continue to confront a stiff resistance near the 1.3000 mark. A sustained move beyond, leading to some follow-through buying above the 1.3035-40 region will negate the bearish set-up and set the stage for an extension of the recent positive move, towards reclaiming the 1.3100 round-figure mark. The momentum could further get extended towards the next major hurdle near the 1.3175-80 region.

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