GBP/USD: Sterling Looks Ripe for Correction

08/27/2024

3 minutes read

2024.08.27 09:06

The British pound has been one of the best-performing currencies in recent weeks, driven by a good run of UK data and expectations that the Bank of England will not cut interest rates at its upcoming meeting.
However, there are signs that a correction may be imminent, as the GBP/USD pair is trading in overbought territory and the RSI is flashing a warning sign.
Other GBP pairs, such as GBP/JPY and EUR/GBP, are also worth watching in the near term.

The Bank of England (BoE) is one of the few Central Banks in the G7 except for the Bank of Japan (BoJ) which isn’t expected to cut rates at its upcoming meeting.

The divergence in rate policy as well as a good run of UK data has made sterling one of the best performers over the last couple of weeks. BoE Interest Rate Probabilities

Source: LSEG

has gained admirable ground against its counterparts, most notably against the weaker . Sterling is trading at multi-month highs against the greenback while starting the week on the front foot against the as well.

The Euro Area economy has not been as strong this year as the UK which has surprised many by the strength of the rebound. This morning the release of German data did not paint a pretty picture as Europe’s most industrialized economy continues to drag on the zone as a whole.

Coupled with a more dovish European Central Bank (ECB) outlook the run-up to the September Central Bank meetings could see the Euro lose more ground to Sterling.

This morning we also heard from UK Prime Minister Keir Starmer who briefly touched on the October budget. The Prime Minister stressed that it will be a painful one but necessary for long-term stability and improvement. Starmer said “Those with the broadest shoulders should pay the heaviest burden” which hints at a tax on the wealthy in the UK

In the short term, GBP pairs remain interesting with cable looking the most likely for a correction. still has room to run to the upside but a stronger has been capping gains of late.

remains under selling pressure in the medium term as well, but given that we are seeing a five-day winning streak for cable, I would not rule out a short-term pullback this week.

Technical Analysis

GBP/USD

From a technical perspective, GBP/USD has been on a tear since the August 8 low of 1.2665. The pair has since rallied around 600-odd pips to the upside to trade above the 1.3200 handle.

Yesterday’s bearish inside bar candle close did hint at a potential retracement but price has since taken out yesterday’s highs. Could this be a fakeout and the price still falls later in the day? Time will tell.

Another hint that a retracement may be imminent comes from the RSI period 14 which is currently in overbought territory. Now as always, this does not mean that the price will definitely fall as at times the RSI can remain above the 70 handle for extended periods as price continues to make higher highs.

However, the RSI can be useful when used correctly and provides another confluence supporting a short-term correction.

GBP/USD Daily Chart, August 27, 2024

Source: TradingView

Support

1.3180
1.3050
1.3000 (psychological level)

Resistance

1.3354
1.3500 (psychological level)
1.3750

GBP/JPY

GBP/JPY continues to work its way higher following the Yen unwind which impacted all Japanese Yen pairs. GBP/JPY dropped to a low of 180.112 on August 5 before beginning its recovery.

Since the pair has rallied all the way back above the 190.00 even if it has been a slow rise higher. The break of the descending trendline does bode well for GBP/JPY as the pair eyes a much anticipated retest of the 200.00 handle.

As things stand on the daily timeframe, a candlestick close above 191.400 would see a morning star candlestick pattern form which hints at further upside.

There are some serious hurdles ahead that the pair will need to overcome as price is currently testing the 200-day MA which rests at 192.00. A break above here will face resistance around the 195.00 handle before the 100-day MA at 197.00 comes into focus.

GBP/JPY Daily Chart, August 27, 2024

Source: TradingView

Support

Resistance

EUR/GBP

The technicals on EUR/GBP point to the pair setting up for a retracement sometime soon. The pair is currently on a five-day decline as Sterling appreciated while the Euro faced pressure.

EUR/GBP is edging lower towards the lows of late July before the 250 pip rally higher.The RSI is currently languishing between the neutral area and the oversold area. Any move lower from here could push the RSI into oversold territory.

0.8400 is also a key area of multi-month support which could be a factor and might be a hurdle too far at this stage.

A move higher from here will leave price having to navigate past the 50-day MA first at 0.8472 before the 100-day MA at 0.8500 comes into focus.