Technical Analysis

GBP/USD Price Analysis – Feb 07, 2024

By LonghornFX Technical Analysis
Feb 7, 20244 min

Daily Price Outlook 

During the early trading hours in Europe on Wednesday, the GBP/USD currency pair stayed on an upward trend, hovering around the 1.2620 level as the US Dollar (USD) showed weakness. The dollar remained under pressure on Wednesday after stepping back from its nearly three-month high. Additionally, the possibility of a technical recession in the UK economy might push Bank of England (BoE) officials towards a more dovish stance on interest rates. This news could cause the British Pound to weaken against the US Dollar due to expectations of lower interest rates.

Impact of Economic Data and Fed Statements on GBP/USD

Despite the recent release of upbeat economic indicators in the US and a reduced likelihood of Federal Reserve interest rate reductions, the broad-based strength of the US dollar faltered, stepping back from its nearly three-month peak. Chair Jerome Powell underscored the Fed's dedication to achieving a 2% inflation target before contemplating any rate cuts. This has led investors to reassess their expectations, with only a 15% probability of rate cuts in March and a 50% likelihood in May.

Consequently, the US Dollar has gained ground against the British Pound. While there were anticipations for rate cuts, Powell's cautious approach and the robust economic data have aligned market sentiment more closely with the Fed's stance, prompting shifts in the bond market.

Therefore, the decreased chance of Fed rate cuts and a stronger US Dollar are pressuring GBP/USD, making it more challenging for the British Pound to maintain its upward trend against the US Dollar.

Impact of Bank of England's Potential Rate Cuts on GBP/USD

Another reason limiting the increase in the value of the British Pound is worries about a potential recession in the UK. This concern could lead the Bank of England (BoE) to think about reducing interest rates. Key figures at the BoE, such as Chief Economist Huw Pill and Governor Andrew Bailey, have hinted at the possibility of lowering rates. Pill has talked about conversations regarding rate cuts, while Bailey has highlighted some improvements in inflation.

Additionally, a BoE spokesperson has indicated that a rate reduction is likely, citing inflation and job market statistics. Despite uncertainties, the BoE is closely watching inflation patterns, postponing rate decisions due to incomplete job market information. These factors are causing the Pound to face pressure as investors adjust their forecasts accordingly.

Therefore, the news of potential rate cuts by the Bank of England and concerns over a recession add downward pressure on the Pound, likely weakening its position against the US Dollar in the GBP/USD pair.

GBP/USD Price Chart - Source: Tradingview
GBP/USD Price Chart - Source: Tradingview

GBP/USD - Technical Analysis

The GBP/USD pair is witnessing modest gains, trading up by 0.07% around the 1.26067 mark. As traders navigate a relatively calm market, the currency pair finds its immediate pivot point at 1.2513, a crucial level that could dictate short-term direction. Resistance is waiting at 1.2576, with further upside barriers at 1.2668 and 1.2737, which could stall any bullish advances. Supports are forming at 1.2421, with additional safety nets at 1.2317 and 1.2217, to catch any bearish dips.

The Relative Strength Index (RSI) lingers near the neutral 47 mark, suggesting a balance in market sentiment. The MACD indicator presents a marginally positive picture, with a value of 0.0006 just above the signal line at -0.0025, hinting at potential for an uptick. However, the proximity of the 50-day EMA at 1.2606 to the current price level underscores a market in equilibrium, neither overbought nor oversold.

Given the current market conditions, a cautious approach is advisable. Traders might consider a sell limit order at 1.26300, targeting a take profit at 1.25600, with a stop loss set at 1.26900 to manage risk effectively.

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