GBPUSD: "Buy the Dip", Don't "Sell the Rip" Says City Index Analyst

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The Pound-Dollar exchange rate (GBPUSD) can remain supported over the coming days with any weakness expected to invite fresh buying interest, according to a new technical analysis.

Fawad Razaqzada, Market Analyst at City Index says GBPUSD is holding above both the 21 and 200-day moving averages, both the short- and that long-term trends are objectively bullish, especially with the slope of these moving averages also being positive.

The call comes in the wake of the Pound-Dollar hitting a near-15-month high on Friday, July 14 following the release of U.S. CPI and PPI inflation that came in below analyst estimates.

Image courtesy of City Index.

The rally has made Sterling overbought against its U.S. rival on some counts with the Relative Strength Index (RSI) sub-index, indicating GBPUSD is ‘overbought’ and so it may need to come down or consolidate for a while before it is ready to go higher again.

But Razaqzada says the momentum readings identify GBPUSD as a "buy the dip" market, rather than "sell the rip," at least from a technical standpoint anyway.

"This means that price is more likely to react to support levels than resistance, as more people would be inclined to look for bullish trades," says Razaqzada.

He says with the UK CPI not out until Wednesday, a bit of consolidation/pullback should not come as major surprise.

"Among the support levels to watch, 1.3000 is now the first line of defence for the bulls," adds Razaqzada. "Lose that and a drop to 1.2850 could be on the cards, a level which was previously resistance."

The City Index analyst expects GBPUSD to find good support around that area, if we get there.

"On the upside, there are not many obvious resistance levels to watch, so just keep an eye on the round handles like 1.31, 1.32 etc," says Razaqzada. "We will remain a bullish GBP/USD outlook until the charts tell us otherwise."

The British Pound will on Wednesday encounter the most important economic release of July in the form of CPI inflation for June which will determine whether the Bank of England will deliver a second consecutive 50 basis point interest rate increase in August.

The Pound has rallied through 2023 as UK inflation has proven more resilient than expected and prompted the Bank of England to take a more assertive stance on monetary policy by hiking interest rates and dropping its cautious guidance.

The inflation release "will prove a crucial test for the Pound," says Justin McQueen, a market analyst at Reuters.

CPI is forecast to have risen 8.2% year-on-year in June, down from 8.7% previously, with core inflation expected to have fallen to 6.8% from 7.1%.

"Currently, markets see a 50bp BoE rate hike at the August meeting as more likely than not, however, this will be dependent on (the) inflation figures," says McQueen.

The rule of thumb is that an undershoot in inflation will result in a weaker Pound and an overshoot in a stronger Pound. But as we note in this article, the opposite reaction might just be true, creating a difficult event to position for in terms of a currency market perspective.