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GBP/USD Forecast: "Is a Correction Finally Brewing"

Pound Sterling vs Dollar

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The GBP/USD exchange rate has pulled back by 0.60% to quote at 1.2670 on Thursday, with analyst and technical forecaster Richard Perry at Hantec Markets saying a recent trend higher is now being tested on the daily chart.

Is a correction finally brewing on GBP/USD?

The run higher has been impressive over the past two weeks, with ten positive closes in a row.

However, we have been increasingly concerned over the small real candlestick bodies which point to a lack of conviction.

This is especially the case in the past couple of sessions.

It is notable that this is coming with the 14 day RSI bumping up against 70.

GBP/USD chart

With a bull failure around $1.2810 in the wake of the FOMC meeting yesterday, GBP/USD has pulled sharply lower overnight.

The recent trend higher is now being tested on the daily chart. On the hourly chart the situation looks more corrective, with the uptrend breaking.

Furthermore, hourly moving averages are falling over and are closing in on “death crosses”, whilst hourly MACD lines show an ongoing negative divergence with price highs of the past week.

The key will be how the market reacts to support in the band $1.2615/$1.2645.

The key breakout of $1.2645 (old April highs) leaves this as underlying demand and a closing breach would be a concern.

However, on the hourly chart we see $1.2615 has been a key pivot support in the past week and a breach would be a confirmed change in outlook. We would then look towards the next support at $1.2500.

The bulls need to reclaim $1.2750 to get their run back on track.

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Dollar Bid as Markets Start to Correct

There has been a mixed read through from the Federal Reserve monetary policy decision yesterday.

The FOMC is still accommodative but remains cautious in its outlook for recovery. Looser monetary policy for longer will ultimately support markets and underpin the risk recovery, with rates not rising until at least 2022, whilst asset purchases will continue to run for several months.

Initially markets took this as a risk positive, however, the positive mood has quickly dissipated.

The Fed is rightfully downbeat on the economic recovery. The road to a V-shaped recovery may not be as smooth as hoped for. Concerns over localised evidence of increasing COVID-19 infection rates in Texas reflect this and have seen the risk recovery roll over this morning.

Suddenly today, we see safety first. The oil price is over -3% lower, whilst the dollar and the yen are performing well through major forex. Equities are sharply lower as US futures move into retreat.

There is plenty of opportunity to take profits on what has been an incredibly impressive risk recovery and it seems that this morning, this move is kicking in. This move is overdue and is likely to end up being the source of the next opportunity to buy again. For now though, a correction is forming.