GBP/USD – Bullish breakout or correction over?

Sterling recovery run its course?

We’ve seen a larger correction in cable than it appeared we may at times a couple of weeks ago and now it’s once again reached an important level that may define the direction of travel in the weeks and months ahead.

The pound has rallied strongly on the belief that the Bank of England is going to raise interest rates once this year and multiple times next, taking base rate above 1% before pulling back shortly after. A sign that markets think a policy mistake in on the cards that the MPC is forced to backtrack on.

Given this, along with the fact that the UK is in a period of sluggish growth facing numerous downside economic risks including an energy crisis, the withdrawal of support measures, higher taxes and higher prices, is it possible that the sterling rebound has run its course?

The pair ran into significant resistance last week around 1.3830, where the 200/233-day SMA band intersects the 50% retracement of the June highs to September lows. This could prove to be a major rotation level if this is simply a corrective move in a broader downtrend.

What’s interesting though is that the pair broke above the 55/89-day SMA band last week and this has been a significant barrier to the upside since it broke below here in mid-June which could arguably make it quite a bullish signal.

Which makes the next breakout all the more interesting. A move through the 200/233-day SMA band suggests we’re back in bullish territory, with just a few more tests just above to further back up that view. The 61.8 fib falls between 1.39 and 1.40, the final major test to the upside that could signal much larger gains ahead.

A break below the 55/89-day SMA takes the pair through recent support and maybe the bottom of a descending triangle on the 4-hour chart around 1.3740.

It would also break 1.37 just below that which would break the same moving averages on the 4-hour chart and further support the view that the cable correction has run its course. Some more barriers to the downside would await but it would be the first big hurdle overcome.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.