GBP/USD is looking to consolidate a little after seeing sellers test waters below 1.2000 last week before price recovered in a surging bounce towards 1.2400 amid the central bank bonanza. The rebound also ran into the 61.8 Fib retracement level of the recent swing move lower in the pair at 1.2386 and that helped to limit the upside for the time being:
Friday saw price pull back lower and nearly erased all of the gains from Thursday but as the dollar is settling a little lower today, we are seeing price action keep around 1.2250 and holding in between its key hourly moving averages:
The technical part of the story suggests that near-term price action is now more neutral and that the pair is consolidating in between its key hourly moving averages of 1.2170 (red line) and 1.2284 (blue line). Further resistance is seen at last week's highs as noted above while downside momentum remains limited as defined by key support around and just below the 1.2000 mark.
Those are the big levels to watch for GBP/USD in terms of the technicals at the moment.
But what is the fundamental part of the story saying? It is very much a tale of divergence at the moment and will continue to stay that way in the months ahead.
All things considered, the UK is leading the recession race among the major economies and the worsening economic situation has already seen a notable drop in cable from 1.30 to 1.20 since April. It is rather clear that markets are preparing for a dire outlook in the UK economy but the real money mover will come from any central bank repricing.
As things stand, money markets are still in firm belief that the BOE will be able to act more aggressively and tighten through to year-end. The same can be said for the Fed. While the US economy is still holding up for now, a material slowdown in the UK might prompt the BOE to move off the tightening path and there will be hell to pay for the pound if that happens.
In all likelihood, most major economies are headed down the same path as the UK and the US might have to deal with a similar predicament in Q4 or early next year. But for the time being, the divergence noted above is the key driving factor for GBP/USD and expect that to remain the case in the months ahead.
