GBP/USD – poised to resume major bearish trend?

GBP/USD began the new trading week on Monday by extending its recent retreat from last week’s one-month high above 1.4600, which is also where its 50-day moving average was situated. This retreat follows a sharp rally within the past couple of weeks that represented an upside pullback within the larger bearish trend.

While significantly lowered expectations of a US Federal Reserve rate hike in the foreseeable future may have capped the dollar’s strength for the time being, the Bank of England (BoE) is arguably even more dovish than the Fed may be when it comes to raising interest rates. As recently as last week, the BoE confirmed expectations that a UK rate hike, which has long been anticipated, will be put on hold even further, with no real indication as to when such a rate hike may occur. The BoE vote to keep rates unchanged was unanimous, and was accompanied by lower forecasts for inflation, economic growth, and wages.

As central bank dovishness now abounds globally, the relative degree of such dovishness may be turned to for hints regarding potential currency trends, when other factors remain constant. In the case of GBP/USD, a BoE that consistently maintains a more dovish stance than the Fed would be a clear bearish signal for the currency pair.

Such a scenario corresponds with GBP/USD’s longer-term technical trend and outlook. The noted rally in the past couple of weeks was little more than a conventional upside pullback within the context of a strong downtrend that has been in place since at least mid-year of last year. This rally retraced 50% of the latest slide (from mid-December down to January’s new multi-year low of 1.4078), before starting to retreat late last week.

In the event of an extended retreat with sustained trading below the 1.4500 level, a continuation of GBP/USD’s entrenched bearish momentum could prompt a further drop to begin targeting the 1.4250 and then 1.4000 support objectives once again.

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