GBP/USD Daily Forecast – Sterling Falls Lower From Three-Week Highs

  • The US dollar is recovering against all of its major counterparts in the early day after a sharp fall on Friday.
  • Manufacturing data out of the UK came in better than expected but failed to provide support.

The sharp drop in the dollar on Friday could be attributed to end of month positioning adjustments, although the next few days might provide further insight into if the greenback has reversed after recovering for most of January.

Price action in Sterling last month largely evolved around ongoing speculation as to whether the Bank of England would lower interest rates. Communication from several BoE members around the middle of January hinted that they would while positive data late in the month shifted the outlook.

The markets have pared back expectations following last week’s decision to keep rates unchanged and are pricing in a roughly 1 in 4 chance of a rate cut at the next meeting which takes place in late March.

Manufacturing data out of both Europe and the UK showed signs of stabilizing and potential for a further recovery. Markit reported the purchasing managers’ index in the UK for the manufacturing sector to climb to 50, taking it out of a contraction. New orders, employment, and business confidence were all reported to rise in January.

Technical Analysis

After briefly climbing above notable resistance at 1.3171 on Friday, GBP/USD has moved sharply lower. The pair gapped down at the open and has witnessed strong selling pressure in the early day.

GBPUSD 4-Hour Chart

A horizontal level at 1.3109 has failed to draw buyers and the exchange rate is trading at the same level seen shortly after last week’s bank meeting.

How the pair reacts around 1.3109 into the North American open might set the tone for the rest of the day. How the pair closes today will be important for a directional bias in the week ahead.

A daily close near current prices will tend to take the steam out of the prior recovery and shift the directional bias to bearish over the next few days.

On the other hand, if the pair recovers back towards 1.3171 today, it would keep the prior bullish bias intact.

From a broader perspective, GBP/USD has been stuck in a range between 1.2961 and roughly 1.3200 since the start of the year. In this context, dips are likely to be bought on an approach to range support with the first level of support falling at 1.3050.

Bottom Line

  • Momentum has reversed in GBP/USD and the pair displays strong bearish pressure in the early day.
  • UK Manufacturing data improved in January after contracting in the prior eight readings.
  • The daily close in GBP/USD today will tend to set the tone in terms of a directional bias over the next few days.