POUND STERLING TALKING POINTS
- UK politics bring brief relief for GBP.
- Spotlight on UK GDP and U.S. CPI next week.
- Price action favors downside bias.
GBP/USD FUNDAMENTAL BACKDROP
The reprieve that pound sterling has received from the resignation of Prime Minister Boris Johnson may be short-lived as the lingering woes present within the UK economy wait to reveal themselves once more. For now, the leader will remain in power until a new leader is elected and should take roughly six weeks to unfold.
While the U.S. dollar continues to remain elevated, we look forward to key UK centric data including GDP (see calendar below) which could exacerbate the worrying fundamental backdrop for GBP. Next week, the Bank of England (BoE) Governor Bailey is scheduled to speak under the current tricky market conditions and could give us more clarity as to the state of the UK economy and influence the current market pricing (BoE rates).
From a dollar perspective, the recent NFP print has set the scene for next weeks U.S. inflation read with where we are looking at whether rising inflation is going to continue (headline inflation) in the midst of lower commodities prices or taper off.
GBP/USD ECONOMIC CALENDAR
Source: DailyFX Economic Calendar
GBP/USD DAILY CHART
Chart prepared by Warren Venketas, IG
Price action on the daily GBP/USD chart shows an attempt by bulls to test the 1.2080 resistance zone to no avail as NFP data smashed forecasts. While this does not invalidate further upside short-term, the general bearish trend remains strong. This being said, we are seeing bullish divergence on the Relative Strength Index (RSI) meaning higher lows on the oscillator while prices show corresponding lower lows. Traditionally, this lends itself to an impending turnaround in price action but can be ambiguous in terms of timing.
Key resistance levels:
- Trendline resistance (black)
- 20-day EMA (purple)
- 1.2080 (76.4% Fibonacci)
Key support levels:
MIXED IG CLIENT SENTIMENT
IG Client Sentiment Data (IGCS) shows retail traders are currently LONG on GBP/USD, with 76% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, recent changes in long and short positioning result in a short-term cautious bias.
Contact and follow Warren on Twitter: @WVenketas
Read the full article here