- GBP/USD has turned south following Thursday’s impressive rally.
- Investors keep a close eye on developments surrounding the mini budget.
- The technical outlook shows that the bullish bias stays intact in the short term.
GBP/USD has lost its bullish momentum and started to push lower early Friday after having reached its highest level in a week near 1.1400 late Thursday. Market participants seem to be refraining from betting on further pound strength as they wait for the UK government to take action on the mini budget.
On Thursday, reports suggesting that British Prime Minister Liz Truss was looking to make drastic changes to the mini budget amid intense political pressure caused UK gilt yields to decline and helped the British pound outperform its rivals. Additionally, the Bank of England (BoE) accepted nearly 4 billion sterling of offers in its daily index-linked and long-dated gilt-purchase operations. Meanwhile, the risk rally that was triggered after the US inflation data made it difficult for the dollar to stay resilient and provided another boost to GBP/USD in the American session.
Early Friday, investors seem to have adopted a cautious stance. Several news outlets said earlier in the day that PM Truss and Finance Minister Kwasi Kwarteng could announce an increase in corporation tax to fund the budget as early as today. On the other hand, Conservative members of Parliament (MPs) are reportedly pressuring PM Truss to sack Kwarteng.
In the second half of the day, September Retail Sales and the University of Michigan’s (UoM) preliminary Consumer Sentiment Survey for October will be featured in the US economic docket. Market participants will pay close attention to the 5-year Consumer Inflation Expectation component of the UoM’s publication.
On Thursday, the US inflation report revealed that the Core Consumer Price Index (CPI) climbed to 6.6% on a yearly basis in September from 6.3% in August. Nevertheless, this data failed to impact the probability of a 100 basis points Fed rate hike in November in a significant way and forced the USD to stay on the backfoot. Hence, a decline in the UoM’s long-run inflation forecast could allow Wall Street’s main indexes to build on Thursday’s gains and weigh on the greenback and vice versa.
GBP/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the four-hour chart holds comfortably above 50, suggesting that the bullish bias stays intact. Nevertheless, GBP/USD needs to clear the 200-period SMA at 1.1300 and in order to attract buyers. In that scenario, 1.1370 (static level) aligns as interim resistance before the pair could target 1.1400 (psychological level) and 1.1500 (the end-point of the latest uptrend).
On the downside, sellers could show interest if the pair falls below 1.1260 (Fibonacci 23.6% retracement) and confirms that level as resistance. In that case, 1.1200 (psychological level, 50-period SMA) and 1.1140 (Fibonacci 38.2% retracement) could be seen as next support levels.