GBP/USD started the week on a strong note, reaching its highest level since February 2022, close to 1.3600. However, it later pulled back as it appeared overbought according to technical analysis. The US Dollar fell due to significant selling pressure. President Donald Trump’s warning of 50% tariffs on EU imports worsened the situation for the Dollar. This allowed GBP/USD to rally notably leading into the weekend.

Technical Analysis of GBP/USD

The technical analysis shows a bullish trend for GBP/USD based on the Elliott Wave theory, suggesting an ongoing upward movement. The pair is in an aggressive upward phase with positive long-term projections. During the week, the British Pound (Sterling) remained strong, staying above 1.3500. This strength was fueled by continued pressure on the US Dollar, intensified by Trump’s tariff threats. We saw GBP/USD reach levels not seen since early 2022, peaking near 1.3600 before a slight pullback. While the pair showed strong momentum at the start of the week, it showed signs of fatigue later on, at least in the short term. Indicators like the Relative Strength Index indicated overbought conditions, suggesting the rally was overstretched and possibly driven by speculation rather than solid economic fundamentals. The drop that followed aligned with prior technical signals. Overextensions often trigger profit-taking, especially amidst volatile macro headlines. This time, the Dollar faced ongoing trade policy risks. Trump’s harsh rhetoric regarding the EU led to decreased demand for the Dollar, allowing the Pound to extend its gains.

Market Sensitivity Dynamics

The market is currently influenced as much by political events as by economic factors. The tariff threat further weakened the Dollar, providing more opportunity for Sterling to rise. This wasn’t merely reactive trading; it was strategic positioning in response to fears of broader economic consequences. From a wave analysis perspective, Elliott Wave structures indicate a definite upward trend. The current cycle appears to be in its active phase. This doesn’t mean a straight rise, but it suggests the likelihood of growth until these formations either complete or show signs of decline beyond minor technical setbacks. For short-term traders, finding the right balance is crucial. We’re in a phase that presents both opportunities and risks. While momentum remains strong, the potential for reversals is higher. Now is not the time to chase gains without caution. Utilizing tighter stop-loss orders and clear setups is essential, especially when political headlines can quickly change the landscape. Monitoring volume changes, breakout confirmations, or market divergences should take precedence over making decisions based solely on headlines. Price movements will react to both US data and trade announcements. If tensions escalate, the Dollar may weaken further, but any easing could quickly reverse market sensitivity. Positions with longer timeframes should consider the upside as still valid, particularly within established bullish trends, but they must also be ready for swings, given changing political factors. Tactically, we should prepare for sudden pullbacks, even with an overall positive outlook. Using layered entries and weighing risks from both Dollar and Sterling sides can provide more flexibility in unpredictable market conditions. Although Sterling has recently outperformed many peers, traders should keep their perspective. A significant move in currency over a short time can trigger adjustments—especially when the underlying fundamentals remain generally supportive. Signs of such adjustments are starting to emerge. Expectations around monetary policy are also coming into play. In the coming weeks, the market may be more sensitive to commentary from the Fed or BoE than to economic data. Traders need to be adaptable, as the focus could quickly shift from trade issues to central bank narratives. We should prepare for periods where technical indicators suggest strength, despite external factors that call for caution. Drawing insights from various sources, being patient with re-entries, and avoiding forced directional bets will be crucial as the next wave unfolds. Create your live VT Markets account and start trading now.

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