GBP/USD retraces 50pc of decline…
Fawad Razaqzada December 1, 2022 12:00 PM
…time for a reality check?
…time for a reality check?
The GBP/USD has stormed higher in recent weeks thanks to a combo of weak US dollar and firmer sentiment across the financial markets. But after a 19% rally from its record low, is it time for a reality check? The cable has also now recovered about 50% of its entire decline from its 2021 high. That’s impressive. But the weak UK macro picture and potential for a rebound in USD both suggest the upside potential is going to be limited from here. That said, the bears will need a confirmed reversal signal first, given the sheer size of the rally – and momentum.
As price action has been quite bullish, conservative traders will need to see a reversal pattern form before potentially looking for short setups. Let’s see if it will form a double top around 1.23 handle, which was also the high in August. If a double top or another reversal pattern is formed there, we will still need to see a lower low for confirmation. The most recent low is at 1.1900. So, that’s the level to watch for a breakdown before we tactically turn bearish towards 1.15ish.
There are a couple of support levels to keep a close eye on in the interim. Among others, we have the 200-day average at around 1.2150/55, which was also the high from last week. Wednesday’s high comes in around 1.2087.
While the dollar has fallen sharply since Powell spoke, and it hasn’t yet bottomed out, we think that the downside should be limited for the greenback. After all, the Fed Chair’s comments were not too dissimilar to what most of his FOMC colleagues have been saying recently. You would have thought that the market may have priced in a 50-basis point rate hike for December by now given the generally less hawkish comments from many Fed officials, and CPI and a few other inflation pointers to back that. Perhaps the markets were not expecting the Fed Chair to explicitly imply that the FOMC will indeed hike by 50bps in December, a slowdown and thus a pivot from the recent 75bps hikes. Powell also said that the Fed doesn’t “want to overtighten, which is why we are slowing down,” but ruled out cutting rates soon.
Additionally, Powell did say something very interesting, which was completely ignore: “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”
He added that the Fed is aiming for “significantly positive real rates,” before a pause. So, don’t be surprised if the dollar rises back from the ashes.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.