GBP/USD Technical Analysis: The Best Sell Plans

The pound should benefit against the euro and the dollar if Chancellor Rishi Sunak’s £15 billion cash donation boosts British consumer confidence over the coming weeks. Sunak said the extra spending will be provided to families struggling with the rising cost of living and therefore economists say the measures will boost economic growth as well. GBP/USD’s odds were good for this as it moved towards the 1.2666 resistance level, which is closest to it, at the start of trading in this important week.

For its part, economic consultancy Capital Economics estimates that GDP growth in the UK will be stronger by 0.2 to 0.3 percentage points. Meanwhile, analysts at Investec and Pantheon Macroeconomics say stronger monetary policy significantly lowers the risks of the UK economy falling into recession.

Inflation in the UK is set to rise further as 8.4million households will see £650 deposited in their bank accounts, complicating the economic outlook given that the cost of living crisis is in fact an inflationary crisis. Sunak has admitted to the UK parliament that the measures will inevitably raise inflation rates, although he believes the extra boost is “manageable”. Meanwhile, additional inflationary pressures will put more pressure on the Bank of England to raise interest rates.

According to Capital Economics estimates, all other things being equal, this loosening of fiscal policy means that to bring inflation back to the monetary policy target of 2%, it needs to be tighter. This confirms their view that the BoE will have to raise rates from 1.00% now to 3.00% next year.

Before that, the pound had fallen sharply during May, with analysts attributing the declines to higher inflation, lower economic growth, falling consumer confidence and the apparent reluctance of the Bank of England to dramatically raise interest rates. Thus, the currency could certainly benefit if UK data surprisingly resumes an upward trend in the coming months, bolstering expectations of a Bank of England rate hike.

Dominic Banning, Head of FX Research at HSBC, said: “The response from UK consumers will be particularly important going forward. The long-running GfK consumer sentiment index fell two points to -40 in May, the lowest score since records began in 1974. This is important for the UK economy as it is driven by the sector services in direct contact with consumers. So what’s good for consumer confidence is good for the economy, and therefore good for the pound.

Economic surveys covering any changes in consumer sentiment and behavior after the UK Treasury announcements are still at least a month away, meaning the wave of deterioration in sentiment towards the UK and the pound has not shot again. As a result, the analyst adds, “the pound is being pushed and pulled by recent government policy statements related to the energy sector, with potentially positive cyclical signals battling conflicting negative structural signals.” Some of the negatives include the anti-corporate nature of the windfall tax on energy producers and the further deterioration in the UK’s debt situation. Until we know how this new fiscal policy interacts with monetary policy, the British pound may find it difficult to define its direction.

According to the technical analysis of the pair: On the daily chart below, the price of the GBP/USD currency pair has started to form an ascending channel opposite the larger declining channel. As I mentioned before, the break of the psychological resistance at 1.3000 will be important for the bulls to continue controlling the trend. The current trend will continue to face a threat if the currency pair moves back near the 1.2490 and 1.2350 support levels, respectively.

I still prefer to sell the currency pair from each bullish level as the US Dollar strength factors continue and may persist for a long time.

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