Image: Photo by Anthony Quintano. Licensing: CC 2.0. Sourced: Flickr.
The British pound is on a softer footing as a recent recovery sequence looks to be faltering.
Some interesting developments on the pound-to-dollar exchange rate's daily chart to digest at the start of the new week, with clear signs that a recent recovery has hit the buffers.
GBP/USD enters the week at a critical technical juncture: the recovery from 1.3160 has brought the pair directly into one of the strongest resistance zones on the chart, where the descending trendline converges with both the 50-day and 200-day moving averages.
With three major technical signals converging in the same area, the market has reached a pivotal point.
A convincing break above this cluster would represent a significant bullish development, signalling that the corrective phase from the May highs has likely ended and exposing 1.3448 initially.
However, failure to overcome this confluence would reinforce it as a major ceiling and raise the risk that sellers regain control, bringing 1.3302 back into focus.
Overall, the technical outlook has improved, but the bulls still have an important hurdle to clear before claiming a more durable trend reversal.
Dollar Strengthen, Helped by Middle East Tensions
The dollar looks to have found some broad-based support at the start of the new week thanks to negative headlines concerning the Middle East where it appears the conflict is starting to heat up once more.
"The week starts with the headlines being driven by the Middle East given the US strikes on Iran, and Iranian counter strikes in the region. For market participants, the ongoing reality is that control over the Strait of Hormuz appears far from settled," says Sam Hill, Head of Market Insights at Lloyd Bank.
Oil prices have risen some 5% since Friday's close, a development that's typically consistent with a firmer dollar.
"Bond markets don’t like the escalation in tensions with US Treasury yields rising," explains Hill. That rise in treasuries also tends to play supportive of the dollar, as does the broader risk-off tone that oftentimes favours the dollar's safe-haven status.
U.S. Inflation is Week's Key Event
The key market-moving calendar event for the coming week will likely be U.S. CPI inflation, set for release Wednesday.
Consensus looks for a reading of -0.1% month-on-month for June, a decline that would reflect the paring of energy price gains that followed the initial stages of the Middle East conflict.
Core CPI - arguably more important for policymakers and financial markets, is nevertheless seen staying at an uncomfortably high 0.3% m/m, up from 0.2%.
The rule of thumb remains that any beat to the expectations can boost the dollar, and any undershoot should weigh.
"The takeaway from the last Fed meeting and the more recent comments from chair Warsh is that if they think core CPI is settling at 3% for the rest of the year then they will act quickly. The market is not ready for a rate hike this month and one following at the September meeting, which I view as increasingly likely," says Neil Wilson, a strategist at Saxo Bank.
