This article was written exclusively for Investing.com
Following a sharp two-week drop, there are good technical and fundamental reasons why the GBP/USD could at least stage a decent recovery from here, and potentially even bottom out.
For a start, you don’t need any technical indicators to tell you sterling is severely oversold, having fallen in each of the previous 6 sessions. It is very uncommon for a relatively stable currency not to bounce after such an extended decline.
With all due respect, this is not the Turkish lira or some other troubled emerging market currency. Also, the Bank of England is not doing what the Bank of Japan has done, so don’t expect a similar move to the JPY/USD.
Interestingly, the cable has found some support today around the psychologically important 1.25 handle, which happens to mark the 61.8% Fibonacci retracement level against the move up from the March 2020 low.
It is also worth pointing out that the next big figure of 1.20 also happens to be around a Fib level (78.6% retracement), although I am not necessarily expecting the cable to get there—not unless the BoE walks back significantly from recent hawkish rhetoric, or the Fed becomes significantly more hawkish.
If you like indicators, the Relative Strength Index (RSI) has reached severely “oversold” levels of
There are more reasons why a rebound is on the card. In response to the start of the pandemic in 2020, the distance between the GBP/USD and the 200-day average was about 10% at its peak, before that gap started to close as the cable recovered. This time, that gap is around 8%, but we have not had another pandemic to expect it to remain this wide for too long. If anything, the BoE is set to tighten its policy by another 25 basis points in the week ahead, and potentially more in the coming months.
For the avoidance of doubt, it is worth pointing out that I am not necessarily calling the bottom here. Rather, I do think that as a minimum we will get a decent bounce of at least a couple hundred pips. My extended objective is around the next psychological level of 1.3000, which also happens to be the base of the breakdown.
It is possible that the cable may remain in a downtrend for a while, given the Fed's desire to front-load rate hikes. So, any bounce we get here should be treated as a rebound in a wider downward trend. As such, it is imperative that traders who are, or are going to be long around current levels book at least some profit near resistance levels, for the downtrend could resume at any moment.
