GBP/USD in for a volatile ride this week, focus on the downside below 1.3890

  • Cable bulls might be coming up for their last breath on a busy week ahead. 
  • The US dollar is a touch softer and testing critical daily support. 
  • Covid, FOMC and the BoE governor are in the mix for the week ahead as the underlying fundamentals. 

GBP/USD is currently trading at 1.3853 and a touch higher on the day by 0.2%. 

Cable has travelled between a low of 1.3816 and a high of 1.3861 so far with technical prospects of a deeper upside retracement to follow, targeting into the 1.3880s. 

From a fundamental standpoint, the pound has come under demand with the British government expected to announce it will proceed with plans to fully reopen the economy in England later this month.

On a wider scope, however, investors are preparing for a period of low volatility ahead of the central bank meetings on both sides of the pond between the Bank of England and the Federal Reserve. 

Meanwhile, it is worth noting the resilience among some commodity currencies that we have seen of late.

This is a possible indication that the FX market is shifting its positioning in a way to maximize carry potential, which does not bode well for the likes of the pound.  

The commodity-linked currencies, for instance, are holding out much better than the low-yielding segment in G10 to the post-FOMC dollar rally.

According to the series of positioning reports, GBP has appeared to have been one of the main victims of the dollar’s short-squeezing and the hunt for yield.

Net GBP long positions consolidated in the most recent CFTC data after the sharp fall the previous week. 

However, if we are in for a quiet summer in terms of volatility, the carry trades may emerge as outperforming currencies vs the low-yielders in the coming weeks.

The week ahead

For the week ahead, the BoE governor is due to speak again.

His comments might take some of the shine out of the pound that is related to UK Prime Minister Boris Johnson setting out his plan to lift most of England’s remaining coronavirus restrictions by mid-July, despite warnings from some experts.

The current surge of Delta variant cases across the country means such a move is premature according to them.

The PM said that the “continuing effectiveness” of the vaccine rollout allows England to consider loosening restrictions, rather than tightening them, as cases climb.

“I want to stress from the outset that this pandemic is far from over,” Johnson told a news conference. “It certainly won’t be over by [July] the 19th,” Johnson explained.

“We’re seeing cases rise fairly rapidly,” the PM added. “There could be 50,000 cases detected per day by the 19th, and again as we predicted we’re seeing rising hospital admissions, and we must reconcile ourselves sadly to more deaths from Covid.”

Nevertheless, the prospects of opening the economy have left the pound in a better mood for the start of the week as investors anticipate inflation risks as a consequence.  

However, the governor of the BoE has warned that the bank shouldn’t overreact to what he views as a temporary spike in inflation and has argued that a rapid recovery after lockdowns end is likely to fade soon.

The BoE governor said, “our current view is that the economy will revert to the lower average underlying growth rates that we have seen since the financial crisis.  Reverting to the pre-Covid pattern of lower trend growth will bring its own challenges.” 

The next policy meeting is August 5 and no change is expected, especially while the lone hawk Chief Economist Haldane is due to step down beforehand.

We also have the minutes of the FOMC this week.

Investors will be looking for further evidence of a hawkish shift at the central bank. This could further fuel the bid in the greenback and weigh on the pound regarded as a lower yielder in the G10 space. 

DXY technical analysis

The daily chart shows the price is testing critical support that could lead to a fresh wave of buying in the coming days if it holds:

GBP/USD technical analysis

The bulls are still up against a strong bearish bias as the monthly chart and structure illustrate, as per the prior analysis from the end of last month, GBP/USD Price Analysis: Bulls battle against gravity:

In more recent trade, the price has indeed moved lower since the prior analysis:

Live market analysis, daily chart

The price is now moving in on the resistance structure in the 1.3870/90s where expectations are for it to hold, according to the monthly downside bias, resulting in a meltdown towards the 1.37 figure. 

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