GBP/USD is attempting to close above an important resistance level at 1.3262 on a monthly basis. If it manages to do so, it will be the first time the pair has closed above it in more than two years.
Similar to most of the major currencies, Sterling has seen follow up gains in August after a notable rally in July. Last month, the pair gained about 6%. From the low in March, GBP/USD is up nearly 17%. These types of gains are rare in the currency markets and puts into question how much further the pair can go.
A speech from Fed Chair Powell last week confirmed that the Fed is changing the way it views inflation and how it relates to monetary policy. Put simply, the Fed will not raise rates if inflation rises in the near-term, signaling that low rates are here to stay for some time.
Interest rates are a big driver for currencies, and naturally, Powell’s speech is considered bearish for the dollar. However, an important consideration is that major economies around the world have all had the same struggles with inflation over the years that the US has had. Further, other countries have also eased monetary policy to combat the virus outbreak, the same way the US has.
Bank of England Governor Carney spoke along these lines on Friday. His emphasis was on easing further and letting the markets know that there are still measures the central bank can take even though the interest rate is already near the zero bound.
The trend in GBP/USD has been to the upside for five months and it’s hard to fight trends. But at the same time, during these five months, the pair has fluctuated well above what is typical for the entire year.
To provide some perspective, when the Brexit vote took place in July of 2016, the pair declined about 8%.
For this reason, the risk to reward does not appear favorable to be long GBP/USD at this stage. Unless the objective is short-term.
As mentioned, the 1.3262 level is significant for GBP/USD on a monthly chart. The pair is currently on pace to close above it on a monthly close basis. This level may act as a line in the sand for a near-term directional bias.
- GBP/USD shows signs of a bullish breakout after breaking above notable resistance at 1.3262 last week.
- The current upside move might be stretched after a 17% rally from the March low.
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