GBP/USD Daily Forecast – Sterling Under Pressure, Back Below 1.25

GBP/USD Fails to Hold Key Support

The theme of pound weakness has been evident as the dollar index is seen ticking higher in early trading while GBP/USD is down nearly half a percent on the day. The British pound is once again the weakest currency on virtually every time frame from daily to monthly.

Support at 1.2500 was considered significant in GBP/USD because of its psychological properties. The failure to hold above it is likely to have caused some stops to be triggered.

In yesterday’s forecast, I discussed conflicting signals on a weekly chart. The drop in the first week of July had resulted in a bearish evening star print while last week’s recovery somewhat negated that prior as it resembled a weekly hammer candle. Today’s decline puts the evening star bearish pattern back into focus.

The US dollar index (DXY) is trying to post a second day of gains which has been weighing on GBP/USD. DXY bounced higher after testing the 200-day moving average on Friday. It is currently testing the 100-day moving average with more resistance from the 50-day moving average nearby.

UK employment data was mostly better than expected but failed to move the exchange rate much. The jobless rate remained unchanged at 3.8% in May while average hourly earnings jumped to 3.4% versus an estimate of 3.1% and a prior reading of the same. Unemployment claims were higher than expected with 38 thousand claims reported in June.

Technical Analysis

Yesterday’s candle print resulted in a bearish engulfing candle on a daily chart. The early-day decline today has nearly fully wiped out last week’s recovery.

The pair is currently testing the upper bound of a declining trend channel that was broken last week. Considering how heavy the pair has sold off, and where DXY is, we might see a bounce from here.

I expect that near-term recovery rallies will be sold off considering the strong downside momentum in the early week. A likely area for sellers to step in is the psychological 1.2500 area.

Bottom Line

• Sterling continues to show weakness when compared to the major currencies
• Rallies into 1.2500 are likely to be met with sellers
• There is some support here from the upper bound of a previously broken trend channel. Further support is at 1.2450 which held the pair higher last week.