Technical Analysis

GBP/USD Price Analysis – May 06, 2024

By LonghornFX Technical Analysis
May 6, 20244 min

Daily Price Outlook

During the European trading session, the GBP/USD currency pair maintained its upward trend, remaining well-bid around the 1.2577 level and hitting an intra-day high of 1.2585. The upward trend was driven by several factors, including a bearish US dollar, which lost traction due to the Federal Reserve's dovish stance on interest rate cuts and disappointing US economic data.

Furthermore, the upticks in the currency pair were further boosted by the Bank of England's hawkish stance on interest rates. The Bank of England is maintaining rates at 5.25%, delaying cuts due to strong wage growth, which is driving higher core inflation.

Weak US Job Data and Expected Fed Rate Cuts Boost GBP/USD Pair

On the US front, the broad-based US dollar lost momentum due to growing expectations of interest rate cuts by the Federal Reserve in 2024. This shift came after the release of disappointing job data.

Now, it's expected that the Fed might cut rates as early as September, instead of November as previously thought. According to the CME FedWatch Tool, there is a 48.8% chance of a 25 basis points rate cut in September, up from 43.8% last week.

On the data front, the latest US Nonfarm Payrolls report showed that the economy added 175,000 jobs in April, well below the expected 243,000. This marks a significant slowdown from March, when 315,000 jobs were added.

In addition, Average Hourly Earnings increased by 3.9% year-on-year in April, just shy of the expected 4.0%, and lower than the previous month's 4.1%. On a monthly basis, earnings grew by 0.2%, slightly less than the forecasted 0.3%.

Therefore, the weaker-than-expected US job data and the growing prospects of a Federal Reserve rate cut in 2024 pressured the US dollar, leading to an uptick in the GBP/USD pair. This shift boosted the British pound against a weakening US dollar.

Bank of England's Hawkish Stance Strengthens GBP/USD Pair

On the UK front, the Bank of England (BoE) is expected to keep interest rates steady at 5.25% in Thursday's meeting. Investors are delaying expectations of rate cuts to September due to concerns about strong wage growth in the UK. BoE Governor Andrew Bailey expressed optimism in April as UK inflation seemed on track to reach the 2% target. The inflation rate dipped to 3.2% in March, the lowest since September 2021, signaling positive progress in inflation management.

Hence, the Bank of England's expected decision to maintain rates at 5.25% and delay potential rate cuts reflects a hawkish stance for the British pound (GBP). Therefore, the anticipation of the Bank of England maintaining rates and postponing rate cuts due to strong economic indicators bolster the GBP against the USD, leading to an increase in the GBP/USD pair.

GBP/USD Price Chart - Source: Tradingview
GBP/USD Price Chart - Source: Tradingview

GBP/USD - Technical Analysis

cAs of May 6, the GBP/USD pair is trading at $1.25467, displaying minimal change with a nearly flat movement, reflecting a delicate balance in market sentiment. Currently, the pair is trading below its pivotal point of $1.26359, indicating that it is in a potentially critical zone where any significant move could determine the direction for the upcoming sessions.

The resistance levels for GBP/USD are set at $1.26346, which nearly coincides with the pivot point, suggesting a crucial threshold. If this level is breached, the next targets for resistance are marked at $1.27064 and $1.27925, delineating possible upper limits in bullish scenarios.

On the downside, the immediate support lies at $1.24667. Further cushions are found at $1.23871 and $1.23006, providing strategic points where buyers might re-enter if the price dips.

The Relative Strength Index (RSI) at 54 signals a neutral momentum, neither overly bullish nor bearish, indicating that the market is waiting for a catalyst. Meanwhile, the 50-day Exponential Moving Average (EMA) at $1.25119 lies just below the current price, supporting a slight bullish bias but calling for caution as it is close to key support levels.

In the context of the current technical configuration and market indicators, a strategy could involve entering a long position if GBP/USD rises above $1.25304, aiming for the pivot point at $1.26359 as a profit target. The stop loss should be strategically placed at $1.24587 to manage risk effectively, ensuring protection against potential downturns.

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