GBP/USD Technical: Bounce Off Key Confluence Level Signals Potential for Recovery

10/24/2024

3 minutes read

2024.10.24 11:25

GBP/USD saw a bounce despite weak UK PMI data, attributed to US Dollar weakness.
The Bank of England may consider interest rate cuts due to slowing inflation, potentially weakening the Pound Sterling.
GBP/USD technical analysis shows potential for a bullish bounce, but a break below the trendline could lead to a larger correction.

Cable has enjoyed a decent bounce this morning off a key confluence level. Despite weak PMI data, some weakness has helped arrest its slide.

Preliminary October in the UK edged lower to 51.7 from 52.6 in October. This begs the question, can Pound Sterling extend its recovery? Economic Events

October data pointed to a moderate increase in UK private sector output, but the rate of expansion slowed for the second month running to its lowest since November 2023. Survey respondents widely commented on the impact of delayed decision-making among clients and heightened economic uncertainty in October. Employment was a particularly weak spot, with overall staffing numbers decreasing for the first time in 2024 to date.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending. Companies await clarity on government policy, with conflicts in the Middle East and Ukraine, as well as the US elections, adding to the nervousness about the economic outlook.”

Encouraging for the (BoE) is the fact that further cooling of input cost inflation to the lowest for four years opens the door for the Central Bank to take a more aggressive stance towards lowering interest rates, should the current slowdown become more entrenched.

This obviously means that the Pound Sterling may face further weakness as rate-cut bets intensify. However, given that the (DXY) is at extremely overbought levels and GBP/USD is at extremely oversold levels, there is still a chance that Cable may rise back above the 1.3000 and potentially higher as well. A lot of this would hinge on how the US Dollar performs over the coming days and weeks.

There are a host of big events over the coming days that could impact markets and relate directly to the GBP and US Dollar. Chief of those being the US election which draws closer with market participants likely to hedge their bets ahead of the big day. This could mean volatility and some whipsaw price action.

On the other end of the pond, we have the UK budget on October 30, which is the first from the UK Labour Government. Big tax increases seem likely because of the rising demands on government funds. More investment is on the way, but will it mean even more borrowing? That’s the big question for markets, and Reeves will need to handle it carefully. There are a host of questions that could spark volatility heading into the event as well.

GBP/USD Technical Analysis

GBP/USD had a brief bounce at the back end of last week that failed to break through the 1.3100 handle before pushing lower. This saw cable break below the 100-day MA and finally test the long-term ascending trendline that has been in play since the April 22 lows.

All of this was discussed in the GBP price action piece last week:

The test of the ascending trendline just below the 100–day MA and key support level do look promising for a bullish bounce. However, the first hurdle would be a daily candle close back above the 100-day MA and then of course the psychological 1.3000 handle.

This would then set the stage for a retest of the resistance area resting just below the 1.3100 range (denoted by the red block on the chart). Acceptance above this level could open up a deeper retracement toward the 1.3250-60 range.

Alternatively, a break of the trendline would be significant and could open up a longer term correction toward the 1.2750 handle for cable. Such a move would hinge on the idea of a continued rally for the US Dollar and DXY in particular. The 200-day MA currently rests around 1.2800 and could prove key as well.

Later today we have speeches from both Catherine Mann and Andrew Bailey of the Bank of England (BoE) which could stoke some short-term volatility. Any comments around rate cuts etc, may also have a more material impact. This would obviously hinge on what the comments are and where policymakers see rates heading in the months to come.