GBP/USD is at a crucial point where weakening bullish strength meets rising bearish pressure. A Doji candle on the daily chart indicates uncertainty. Buyers are trying to hold the 1.3390–1.3370 range, even after some downward movement. GBP/USD has dropped below its upward channel, currently sitting just above 1.3400. Major support can be found at the 23.6% Fibonacci retracement level from the January–July rally. The price remains under the 50-day and 20-day Simple Moving Averages, showing a decline in short-term bullish momentum.

Momentum Indicators and Technical Analysis

Momentum indicators are shifting away from bullish signs. The Relative Strength Index is close to the oversold level around 39, while the Average True Range, at 0.00927, indicates lower daily volatility, hinting at a potential breakout. If GBP/USD drops below 1.3390, the next targets will be the 100-day SMA at 1.3281 and the 38.2% Fibonacci level at 1.3144. The short-term trend shows selling pressure is still strong, and bulls need to reclaim the 50-day SMA to regain control. The Pound Sterling is the oldest currency in the world and the fourth most-traded, with the Bank of England’s policies impacting its value directly. Key economic indicators like GDP, PMIs, and trade balance play a crucial role in setting its direction. Given the indecisive technical situation, now seems like a good time to prepare for a downward move by buying put options. The Doji candle along with the failure to stay within the upward channel indicates that bullish strength is fading. Buying puts allows for profit from a potential decline while limiting risk to the premium paid.

Fundamental Pressures and Market Dynamics

This bearish outlook is supported by fundamental pressures on the Pound Sterling. UK inflation hit the 2% target in May 2024 for the first time in nearly three years, yet stubbornly high services inflation at 5.7% is pushing the Bank of England towards possible interest rate cuts in August or September. This diverging policy with a more aggressive U.S. Federal Reserve strengthens the case for a weaker British currency. Conversely, the dollar remains strong due to a solid labor market and a steady central bank. The recent Non-Farm Payrolls report revealed the addition of 272,000 jobs in the U.S., surpassing expectations and reinforcing the “higher for longer” interest rate outlook. This fundamental contrast makes shorting GBP/USD appealing. The reduced daily volatility indicated by the Average True Range presents an opportunity. Lower volatility usually means cheaper option premiums, making it a good time to buy our puts before any potential breakout. We can secure downside protection at a lower cost ahead of an expected increase in price movement. Historically, significant monetary policy differences, like those seen in 2022, have led to notable drops in this currency pair. If the price breaks below the critical 1.3390 support level, we see a clear pathway towards the 100-day moving average and then the next Fibonacci target. This past behavior suggests a swift decline is likely if key supports are breached. Our strategy will be invalid if bulls reclaim the 50-day Simple Moving Average. A close above this level will signal us to reassess or abandon our bearish positions. For now, all signs suggest gearing up for a downturn towards the 1.3281 level. Create your live VT Markets account and start trading now.

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