Technical overbought state of GBPUSD signals imminent correction

11 March 2024 52
Technical overbought state of GBPUSD signals imminent correction

The British pound has been supported in recent weeks by a wave of unbridled optimism driven by the country's strong economic performance against forecasts.

The British pound has outperformed more than 90% of the global currencies this year, showing that the country’s economy is holding up better than expected, with interest rates remaining at high levels for a long period of time.

According to Bloomberg, only 11 out of 140 world’s currencies have outperformed the pound in 2024.

The reason is simple, as analysts said: the British economy looks more stable than feared. This should encourage the UK to keep interest rates at current levels longer than many of its major counterparts, including the US Federal Reserve and the European Central Bank.

While the Fed and the ECB are expected to cut rates in June, traders predict that the Bank of England may start monetary policy easing no earlier than in August.

Last year, the UK had the worst growth-inflation ratio among the largest economies. Now the country’s economy seems to be recovering and inflation is slowing, according to Bank of America, which now forecasts the pound to rise to $1.37 by the end of the year. The data mix is getting better, supporting the pound, especially with the bearish consensus.

Monthly gross domestic product data is likely to show the economy's rebound in January after a slight decline in December, while industrial production is expected to report a 0.7% year-on-year increase, which is a bit faster than last month.

The UK avoided a sharp drop, which many had forecasted for 2023, but aggressive rate hikes up to 5.25% led to economic stagnation. Consumers came under great pressure as the cost of food, energy and mortgage surged, reducing spending, and business confidence fell to its lowest level since the global financial crisis.

The pound's rally also gained support after the market put behind the uncertainty over the UK budget announcement. Some investors were concerned that the government could announce large spending ahead of the elections later this year.

But any strong rally sooner or later ends, and the currency goes into correction. The GBPUSD pair is already showing a strong technical overbought on many indicators, including Bollinger Bands and RSI, thus the targets of the upcoming correction should be analyzed. The most likely target for GBPUSD now looks like 1.2800.

The overall recommendation is to sell GBPUSD. Profit should be taken at the level of 1.2800. A Stop-loss could be set at the level of 1.2900.

This content is for informational purposes only and is not intended to be investing advice.

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