GBP/USD fails to maintain relief rally

Despite having attempted the most significant bounce in more than a month late last week, GBP/USD was unable to maintain its bear market relief rally as of Monday morning, as the short-lived rebound showed signs of losing momentum.

After dropping to nearly a six-year low of 1.4078 this past Thursday, GBP/USD rose sharply on Friday to break out above the key 1.4250 resistance level once again. This rise came despite a significantly worse-than-expected reading for UK retail sales that came out on Friday. The surge could be attributed to the fact that GBP/USD was extremely oversold from a technical perspective after such a steep plummet over the past several weeks and months, and was due for a short-covering/profit-taking bounce.

Despite this rally attempt, downside momentum and overall bearish sentiment continue to dominate this currency pair. This is due in part to continued doubt and uncertainty surrounding the Bank of England’s (BoE) inclination to follow the Federal Reserve’s lead in raising interest rates, given substantial concerns over low inflation and weak economic growth.

This week could provide some more clarity as to the monetary policy trajectories of both the BoE and Fed, which are among the most crucial drivers of GBP/USD exchange rate movement. On the UK side, BoE Governor Mark Carney’s speech on Tuesday may provide some clues as to how the central bank sees the recent global market volatility and how that may potentially affect a rate hike going forward. Thursday’s Preliminary GDP reading for the UK will provide a vital snapshot of economic growth, which is a key component of interest rate decisions. On the US side, the Fed’s critical FOMC statement on Wednesday will be closely watched for any hints regarding the pace and timing of future rate hikes in the US.

From a technical perspective, GBP/USD continues to show a heavy bearish bias stemming from a strongly entrenched downtrend that began to accelerate even further in mid-December. Currently, the key price area to watch continues to be around 1.4250. Any sustained trading under this level should place into view the next target at the 1.4000 psychological support level. Further to the downside, on any break below 1.4000, the next major price objective on a longer-term continuation of the sharp downtrend is at the 1.3600 level.

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