Technical Analysis

GBP/USD Price Analysis – May 20, 2024

By LonghornFX Technical Analysis
May 20, 20244 min

Daily Price Outlook

During the European trading session, the GBP/USD currency pair has been showing bullish performance, remaining well bid around the 1.2702 level and hitting an intraday high of 1.2712. This upward trend can be attributed to speculation surrounding the Federal Reserve's (Fed) monetary policy.

Investors are increasingly confident that the Fed will initiate interest rate cuts starting from the September meeting. This anticipation has put pressure on the US Dollar, causing it to lose ground against other major currencies like the Pound Sterling.

Besides this, the demand for riskier assets has increased, boosting confidence in the Pound Sterling. This is evident in the rise of S&P 500 futures during the European session. Investors are opting for higher returns in riskier investments, favoring currencies like the Pound Sterling over the US Dollar, which has led to its appreciation.

Investor Caution and Fed Policy Impact on GBP/USD Pair

Investors are feeling more cautious due to their belief that the Fed will cut interest rates. This caution comes despite weaker economic signs in the US, like lower Consumer Price Index (CPI) numbers and a softer job market.

However, the Fed is leaning towards keeping interest rates steady, as they think that a temporary drop in inflation isn't enough to be confident that inflation will rise to their target rate of 2%.

Investors' cautiousness about Fed rate cuts, despite weaker US economic signs, has supported the GBP/USD pair. They prefer Pound Sterling over the US Dollar, boosting the pair's performance.

Impact of April’s UK Headline Inflation and Expectations of BoE Rate Cuts:

On the UK front, April's headline inflation is expected to reach nearly 2%. This anticipated decrease in inflationary pressures could raise expectations of rate cuts by the Bank of England (BoE). Investors are looking ahead to potential interest rate cuts by the BoE, possibly beginning as early as the June meeting.

Such a move could negatively impact the Pound Sterling, as historically, higher interest rates set by the central bank tend to strengthen the currency's appeal.

This situation highlights a key factor influencing the future performance of the GBP/USD pair, as market participants weigh the implications of UK monetary policy on the currency's value.

Therefore, the expectations of BoE rate cuts will influence investor sentiment towards the GBP/USD pair. If the BoE does indeed lower interest rates, it could weaken the Pound Sterling against the US Dollar.

Investors will closely monitor commentaries from BoE Deputy Governor Ben Broadbent and BoE Governor Andrew Bailey for insights into the interest rate outlook, which will further impact the performance of the GBP/USD pair in the coming days.

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

GBP/USD - Technical Analysis

GBP/USD is currently trading at $1.27043, up 0.05% on the day. The 4-hour chart highlights the pivot point at $1.27, a crucial level for determining near-term price action. Immediate resistance is seen at $1.2735, followed by $1.2765 and $1.2792.

On the downside, immediate support lies at $1.2656, with further support at $1.2628 and $1.2605.

The Relative Strength Index (RSI) is at 64, indicating a moderate bullish momentum without yet reaching overbought conditions. The 50-day Exponential Moving Average (EMA) is positioned at $1.2649, reinforcing the bullish trend.

This level acts as a dynamic support, suggesting that the current upward momentum may continue as long as the price remains above it.

Traders should monitor the pivot point at $1.27 closely. A sustained move above this level could drive GBP/USD towards the immediate resistance at $1.2735 and potentially higher towards $1.2765 and $1.2792.

Conversely, if the pair fails to hold above the pivot point, it could retrace towards the immediate support at $1.2656, and further down to $1.2628 and $1.2605.

The market sentiment appears cautiously optimistic, with the pound benefiting from broader market trends and technical indicators. The RSI value of 64 suggests there is still room for upward movement before entering overbought territory, while the 50 EMA at $1.2649 provides a strong support level.

In this scenario, the recommended strategy is to buy above $1.26821, with a take profit level at $1.27407 and a stop loss at $1.26527. This approach aligns with the current technical indicators and overall market sentiment, offering a favorable risk-reward ratio.

In conclusion, GBP/USD remains bullish as long as it stays above the $1.27 pivot point. Traders should watch key resistance levels at $1.2735, $1.2765, and $1.2792, and be cautious of potential pullbacks towards support levels if the pivot point is breached.

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