GBP/USD Fundamental Backdrop

Pound sterling trades marginally higher against the U.S. dollar this morning but recent news around the stoppage of gas flows via a major pipeline to Europe has stemmed fears around an impending energy crisis. An already beleaguered UK economy will surely feel the inflationary pinch as the region heads into the winter months. UK gas prices are roughly 3% at the time of writing but one positive for the UK economy comes from their gas storage levels which are currently 100%(see chart below).

UK Gas Prices

Source: Refinitiv

UK Gas Storage Levels (%)

Source: Refinitiv

The Bank of England (BoE) already faces a tough challenge as recessionary expectations in Q4 mount however money markets have increased their interest rate bets for the September meet roughly 4bps from Monday. A 75bps hike remains an option as I do not envisage an aggressive BoE over the winter months so front-loading now may be necessary.
 

Bank Of England Interest Rate Probabilities

Source: Refinitiv

GBP/USD Economic Calendar

The economic calendar (see below) for today is stacked with U.S.-centric data with a focus on Fed officials as well as the ADP employment data. From a Fed perspective, I foresee a continuation of the hawkish disposition by Fed Chair Jerome Powell last week Friday through the Loretta Mester later this afternoon which could result in additional support for the greenback.

Source: DailyFX Economic Calendar
 

Technical Analysis

GBP/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

GBP/USD price action stays respective of the Relative Strength Index (RSI) trendline support (green) which also suggests potential bullish divergence. Bullish divergence refers to contradictory price movement (lower lows) relative to the RSI (higher lows) often leading to a reversal to the upside. In this situation, the current fundamental environment is not supportive of a stronger pound and a break below RSI trendline support or the 1.1600 psychological support level may invalidate bullish divergence and bring subsequent support zones into consideration.

Key resistance levels:

• 1.1890
• 1.1800
• 1.1717

Key support levels:

• 1.1600
• 1.1410
   

Mixed IG Client Sentiment

IG Client Sentiment Data (IGCS) shows retail traders are currently LONG on GBP/USD, with 78% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning, we arrive at a short-term cautious bias.

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