GBP/USD outlook: Currency Pair of the Week – September 30, 2024

• GBP/USD outlook: Bulls eye 3rd monthly gain as correction risks rise
• GBP/USD technical analysis point to overbought conditions
• Can US data trigger a dollar recovery this week?

GBP/USD outlook: Bulls eye 3rd monthly gain as correction risks rise

The GBP/USD has been steady in the last few trading sessions, holding onto the decent gains it has made in Q3. Unless we see a surprise 2% drop today, the cable is on track to close higher for the third consecutive month. But as rates approach the key 1.35-1.40 long-term resistance range, the upside could be limited moving forward. A slew of important US data—including the monthly jobs report—is on the horizon this week, and the cable’s near-term direction hinges on these economic releases.  While the broader US dollar trend remains bearish, the GBP/USD outlook is not so certain. With much of the dollar weakness already factored in, a pullback in the cable could be on the horizon as we approach this week’s US employment data.

Before discussing this week’s macro highlights, let’s talk about those technical levels and factors first.

GBP/USD technical analysis

Year-to-date, the GBP/USD is up about 5.3%. While the potential to extend these gains is there, the cable is now less than 70 pips away from testing a key long-term resistance zone between 1.3500 and 1.4000. Since the 2016 Brexit vote, this range has acted as a ceiling, repeatedly rejecting the pair’s attempts to break higher, even if we have had a couple of temporary breaks above this zone. As rates approach this area again, will history repeat itself, or will a weakening US dollar open the door for more gains?

The weekly chart, meanwhile, shows that price is approaching overbought levels. Momentum indicators like the Relative Strength Index (RSI) suggest caution as it climbs above the 70.0 threshold. The last couple of times that the weekly RSI has climbed above 70, we have seen significant drops in subsequent months.

On the daily time frame, the RSI is in a state of negative divergence – i.e., it is forming a lower high relative to the underlying price making a higher high. This is considerable to be a sign of waning bullish momentum.

While the momentum indicators are signalling overbought conditions, what is missing so far is the bearish reversal signal on what matters the most: price. The GBP/USD has not yet created a bearish price pattern to encourage the bears to short it. The series of higher highs and higher lows must end before the GBP/USD outlook turns bearish. Therefore, the overbought conditions, at this stage, should be viewed as a warning for the bulls that we could see some profit-taking or some short-term weakness. The bears will need to remain patient until a clear reversal signal emerges.

Key short-term support comes in around 1.3265, a level that had marked the high in August. Below this level, 1.3200 is the next support to watch followed by the Jul 2023 high of 1.3142 – once resistance, this level may now offer support on a pullback. But given those RSI overbought conditions on higher time frames, it is possible we could see a deeper drop than these levels before the GBP/USD becomes attractive again.

GBP/USD outlook: Can US data trigger a dollar recovery this week?

Last week was packed with stimulus announcements from China, bolstering optimism about central bank easing globally. In the US, weaker data and growing speculation that the Fed might deliver another significant rate cut before returning to a more typical 25-basis point pace has also weighed on the dollar. Domestically, there’s not much excitement for the UK, but the yield advantage of gilts could help limit any substantial downside for the pound. That said, with key US data looming this week, a slight dollar recovery wouldn’t be shocking, as there is always the potential for data to surprise to the upside. Even if it doesn’t, much of the weaker US dollar and interest rates narrative is already priced in. So, the GBP/USD may struggle to keep rising without first staging a pullback.

In a week filled with high-impact US data, the JOLTS job openings report on Tuesday could be the one to watch. With the Fed’s focus shifting from inflation to employment, another weak jobs number could heighten expectations for a 50-basis point rate cut in November, adding more pressure to the dollar. Keep an eye out for the employment components in the ISM services and manufacturing PMIs later in the week, which will offer further insights into the health of the US labour market. But the big one will be Friday’s non-farm jobs report. In August, the US added 142K jobs, below forecasts of 160K. July’s figure was revised lower by 25K, while June’s was revised down by 61K. Despite this, the unemployment rate fell as expected to 4.2%, and average weekly earnings grew by 0.4%, surpassing forecasts. Concerns about labour market health drove the Fed’s September rate cut, and if the job market cools further, the chances of another significant cut will rise. However, if the September jobs report surprises to the upside, it could dent the current bullish GBP/USD outlook.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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