GBP/USD Technical Analysis: Stability Awaiting Catalyst

The attempts to rebound upwards for the GBP/USD currency pair are still continuing since yesterday. It jumped to the resistance level 1.3830, but it returned to retreat to the support level 1.3758 before settling around the 1.3775 level at the time of writing the analysis. The pound reversed half of its four-month decline from its early June highs last Thursday when the dollar rebounded in a market that had largely benefited from it until that point, dragging the pound to 1.3750 this week.

An important factor for the pound's recovery against the dollar was the Bank of England's rapid shift to a more “hawkish” stance on inflation and interest rates, which will again be in focus this week after Bank of England Governor Andrew Bailey's comments on Sunday. “As I said before, monetary policy cannot solve supply side problems, but it will and should act if we see a risk to medium-term inflation and especially medium-term inflation expectations,” Governor Bailey said in a statement. This was part of a panel discussion at the 36th Annual International Banking Symposium for the Thirty Group on Sunday.

Bank of England Governor Bailey told panelists and the public that recent spikes in inflation are still likely to be short-lived because the underlying causes - such as changes in commodity prices and other costs from supply chain disruptions - are themselves temporary. But he also acknowledged that the recent increases in energy prices, which include a 165% rise in natural gas prices for the quarter ending in mid-October, could mean inflation will remain at abnormally high levels for longer than previously expected and may eventually necessitate a response from the Bank. England.

The FX market has been slow to recognize the risk that the BoE could start reversing the 2020 bank rate cuts anytime over the coming months, but Sunday's comments were the most frank yet and left no room for further confusion.

So Robert Wood, UK economist at BofA Global Research, says: “We think the BoE will judge that a 15bp rate hike in the near term, while raising rates to 0.25%, won't do much to damage growth, but will signal its interest and inflation. We chose the December increase because the Bank of England would have October labor market data at that point, and Saunders noted December rates,” Wood and colleagues wrote in a research briefing late last week.

With abnormally high inflation likely to persist for longer than previously envisaged, the Bank of England recognizes that it could affect corporate price-setting intentions and workers' wage requirements in a way that risks creating a self-cycle of above-target inflation. “That is why we have indicated at the Bank of England - another such signal - that we will have to act,” Bank Governor Bailey said ahead of the start of trading this week.

Technical Analysis

On the daily chart, the GBP/USD currency pair is still in a good position to breach the general bearish trend, and the trend will turn strongly by breaching the 1.4000 psychological resistance, which may motivate the bulls to control the performance for a longer period and increase long positions. The GBP/USD will give up the upside if it returns to the vicinity of the support level 1.3610.

Today, the pound will be affected by the announcement of the British budget figures, and the dollar will be affected by the announcement of the US durable goods orders.