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May 5, 2021

GBP/USD Deep Dive: Higher High To Come?

Bart Kurek

Looking at the overall market movement on this pair, we can see that price has been steadily increasing within the long-term channel formed from the initial Covid-19 drop back in March last year. Price has successfully created higher highs and higher lows, respecting the channel's bottom and making an overall move to the upside.

Price is now making it's next higher low and 1.365, touching the channel's bottom, after recently breaking 3-year highs surpassing 1.42 in late February.

Recently, price broke out of this bullish flag pattern to the upside, and we are now seeing price retrace this move, and using the significant 1.38 level as support, which we have seen has constantly been jumping between support and resistance in the past. I am looking for price to show clear rejection to the channel's bottom and this significant level before going long on this pair.

Coming up on the 6th of May, we've got the BoE releasing their Monetary Policy Summary, Report & Asset Purchase Facilities.

It is forecasted that there will be no changes to interest rates and asset purchases for now. However, market watchers predict that a reduction in the weekly pace of gilt purchases from £4.4B down to £3B may be announced. Or similarly, the BoE could drop some forward guidance about a steeper cut to £2.5B in the following June meeting. Now that a plan for reopening the economy is underway, policymakers might even upgrade their growth and inflation forecasts.

These upgraded economic forecasts and reductions in weekly gilt purchases could cause massive strength in the Pound as this puts the BoE closer to tightening policy. The MPC Meeting will likely cause volatility in the market if the transcript contains more clues on the BoE's tapering or tightening road map.

Currently, looking at retail sentiment data, we can see GU is very mixed at the moment, with pretty much half retailers are long and the other half are short, there is not a clear division.

Overall, I'm bullish on GU and have been for a while now. I think a setup like the one above could be likely, and we could see GU sure upwards tomorrow following the news coming out. However, if we see retail sentiment data show most traders going long at the channel's bottom, I would expect banks to take out these trades, pushing price lower before the huge upwards movement.

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