GBP/USD Technical Analysis: Oversold Levels

The British pound suffered a significant loss in value against the euro, dollar and other major currencies last week. In the case of the GBP/USD currency pair, it fell to the support level of 1.2275, the lowest in two years, before closing stable trading around the 1.2335 level. Analysts say more losses are possible this week, although a short rally cannot be ruled out.

Sterling exchange rates fell sharply following the UK central bank’s decision to hike 25 basis points, but it warned that economic growth was likely to stagnate and inflation would rise more than originally planned. This was the latest set of forecasts from the bank, and the message it contained that the market is expecting too much upside, causing expectations to recalibrate lower, and for the pound.

According to the evolution of the foreign exchange market, the exchange rate of the pound against the euro fell by 1.44% last Thursday only, and lost 2.0% for the month of May. The pound-dollar exchange rate faces an even bigger loss of 4.30% for the month of May. “The narrative is very strong at the moment, and it’s hard to see a big rally in sterling,” JP Morgan’s FX desk told clients.

Overall, the GBP/USD currency pair halted the current bearish move on Friday and is trading fairly flat after the latest set of US data. Now it looks like the currency pair has found support around 1.2332 after the US Department of Labor brought back US employment data with mixed results.

Meanwhile, forex analysts at ABN AMRO say they also expect further weakness in the pound against the euro and the dollar. While ABN AMRO economists expect two more rate hikes from the bank in 2022, which is a bigger shortfall than the market is still expecting. These rallies are seen in June and August, but then expect the BoE to turn dovish as recession risk begins to weigh more heavily in policy deliberations.

As a result, the bank’s analysts say: “Our new view is even more pessimistic than financial market prices. Therefore, we continue to expect further weakness in the pound. ABN AMRO expects the exchange rate of the euro against the pound to be at 0.85 at the end of June, 0.85 at the end of September and 0.86 at the end of December. This gives an expectation of the pound against the euro at 1.1765 and 1.1630. Their point forecast for the GBP/USD exchange rate is 1.26 at the end of June, 1.24 at the end of September and 1.22 by the end of the year.

Readers hoping for a rebound in the pound should note that short-term momentum remains firmly in motion against the currency, although some short-term relief rallies may form next week. But for now, there is a consensus among forex analysts that any strength is likely to be short-lived.

However, a more durable recovery could form once the market clears up the excessive number of interest rate hikes that the bank anticipates.

From the technical analysis of the currency pair: In the short term and based on the performance of the hourly chart, it appears that the GBP/USD currency pair is trading within a descending channel formation. This indicates a short-term bearish slope in market sentiment. Therefore, the bears will look to maintain control of the currency pair by targeting profits around 1.2245 or lower at 1.2150. On the other hand, bulls will target potential rallies around 1.2435 or higher at 1.2526.

Over the long term and based on the performance on the daily chart, it appears that the GBP/USD currency pair is trading within a descending channel formation. This indicates significant long-term bearish momentum in market sentiment. Therefore, bears will look to ride the current trend formation towards 1.2063 support or lower to support 1.1689. On the other hand, bulls will be looking for long-term profits around the 1.2622 resistance or higher at the 1.2996 resistance.

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