**GBP/USD Extends Into a Two-Day Bullish Recovery as 1.34 Holds**
*By Ross J Burland, FXStreet*
The pound sterling continues to show signs of renewed strength, extending its bullish recovery for a second consecutive session after robust support at the crucial 1.3400 level. This resurgence in GBP/USD comes amid an environment of heightened volatility across global financial markets, as traders continually reassess expectations surrounding central bank policy, risk appetite, and macroeconomic trends.
As the GBP/USD pair navigates a shifting landscape in both UK and US economies, the latest price action underscores the resilience of the pound and hints at potential scenarios moving forward. Below, we examine the technical outlook, fundamental drivers, and possible next steps for this key currency pair.
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### Market Context: Retracing from Multi-Week Lows
Last week witnessed a pronounced decline in GBP/USD, with the currency pair falling to test multi-week lows just above the 1.3400 handle. This selloff was driven by a combination of factors, including a stronger US dollar, risk-averse sentiment amid concerns about global inflationary pressures, and uncertainty regarding monetary policy trajectories on both sides of the Atlantic.
However, the ability of the 1.3400 psychological support to hold firm has sparked a short-term rebound, with buyers returning to the market. The move higher has been reinforced by:
– A broad-based pullback in the US dollar
– Diminishing expectations for an immediate aggressive stance by the Bank of England (BoE) and the Federal Reserve (Fed)
– Some improvement in risk sentiment across equity and commodity markets
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### Technical Analysis: Support and Momentum Flip the Script
From a technical standpoint, the GBP/USD pair has staged an impressive two-day recovery stemming from the 1.3400 level, a long-standing technical floor that acted as resistance in prior weeks and months.
**Key technical highlights include:**
– **Support at 1.3400**: This zone not only marked the recent pullback low but also lines up with prior pivot levels, underscoring its technical significance as a makings of a strong base for bulls.
– **Short-term moving averages**: The recent bounce has pushed GBP/USD back above its 20-period moving average on the 4-hour chart, signaling improved short-term momentum.
– **Bullish reversal candlestick patterns**: The daily chart registered a bullish engulfing pattern, suggesting that the downtrend is losing steam and buyers are regaining control.
– **Momentum oscillators**: Relative Strength Index (RSI) readings have rebounded from oversold territory, confirming the potential for a continued corrective rally.
– **Next resistance targets**: With the bounce underway, the next upside barriers are spotted at 1.3500 (psychological round number), followed by 1.3560 (previous consolidation high).
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### Fundamental Factors Shaping GBP/USD
While technicals offer clues regarding potential price action, the sustained direction of GBP/USD is heavily dependent on evolving macroeconomic fundamentals and policy expectations.
#### Diverging Central Bank Pathways
– **Bank of England**: The Bank of England has adopted a cautious tone in recent policy meetings, showing an increased willingness to act on inflation but stopping short of signaling immediate rate hikes. Market participants are closely watching for greater clarity on the timing and pace of normalization, particularly after stronger-than-expected UK inflation prints.
– **Federal Reserve**: Across the Atlantic, the US Federal Reserve has also pivoted toward tapering asset purchases, albeit with some hesitancy given mixed economic data and persistent uncertainties around labor market recovery.
The contrast in policy outlooks has, at times, lent both support and headwinds to GBP/USD. Current pricing reflects a delicate balance, where subtle shifts in rate expectations on either side can spark outsized moves in the currency pair.
#### UK Economic Fundamentals
Britain’s economic recovery remains in focus, as recent data has painted a nuanced picture:
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