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• The British pound has been one of the best-performing currencies in recent weeks, driven by a good run of UK data and expectations that the Bank of England will not cut interest rates at its upcoming meeting.
• However, there are signs that a correction may be imminent, as the GBP/USD pair is trading in overbought territory and the RSI is flashing a warning sign.
• Other GBP pairs, such as GBP/JPY and EUR/GBP, are also worth watching in the near term.

The Bank of England (BoE) is one of the few Central Banks in the G7 with the exception of the Bank of Japan (BoJ) who are not expected to cut rates at its upcoming meeting. The divergence in rate policy as well as a good run of UK data has made sterling one of the best performers over the last couple of weeks.

Source: LSEG

Sterling has gained admirable ground against its counterparts, most notably against the weaker US Dollar. Sterling is trading at multi-month highs against the greenback while starting the week on the front foot against the Euro as well.

The Euro Area economy has not been as strong this year as the UK which has surprised many by the strength of the rebound. This morning the release of German data did not paint a pretty picture as Europe’s most industrialized economy continues to drag on the zone as a whole. Coupled with a more dovish European Central Bank (ECB) outlook and the run up to the September Central Bank meetings could see the Euro lose more ground to Sterling.

This morning we also heard from UK Prime Minister Keir Starmer who briefly touched on the October budget. The Prime Minister stressed that it will be a painful one but necessary for long term stability and improvement. Starmer said “Those with the broadest shoulders should pay the heaviest burden” which hints at a tax on the wealthy in the UK

In the short term, GBP pairs remain interesting with cable looking the most likely for a correction. GBP/JPY still has room to run to the upside but a stronger Yen has been capping gains of late. EUR/GBP remains under selling pressure in the medium term as well, but given that we are seeing a five-day winning streak for cable, I would not rule out a short-term pullback this week.

Technical Analysis

GBP/USD

From a technical perspective, GBP/USD has been on a tear since the August 8 low of 1.2665. The pair has since rallied around 600-odd pips to the upside to trade above the 1.3200 handle.

Yesterday’s bearish inside bar candle close did hint at a potential retracement but price has since taken out yesterday’s highs. Could this be a fakeout and the price still falls later in the day? Time will tell.

Another hint that a retracement may be imminent comes from the RSI period 14 which is currently in overbought territory. Now as always, this does not mean that the price will definitely fall as at times the RSI can remain above the 70 handle for extended periods as price continues to make higher highs.

However, the RSI can be useful when used correctly and provides another confluence supporting a short-term correction.

GBP/USD Daily Chart, August 27, 2024

Source: TradingView (click to enlarge)

Support

• 1.3180
• 1.3050
• 1.3000 (psychological level)

Resistance

• 1.3354
• 1.3500 (psychological level)
• 1.3750

GBP/JPY

GBP/JPY continues to work its way higher following the Yen unwind which impacted all Japanese Yen pairs. GBP/JPY dropped to a low of 180.112 on August 5 before beginning its recovery.

Since the pair has rallied all the way back above the 190.00 even if it has been a slow rise higher. The break of the descending trendline does bode well for GBP/JPY as the pair eyes a much anticipated retest of the 200.00 handle.

As things stand on the daily timeframe, a candlestick close above 191.400 would see a morning star candlestick pattern form which hints at further upside.

There are some serious hurdles ahead that the pair will need to overcome as price is currently testing the 200-day MA which rests at 192.00. A break above here will face resistance around the 195.00 handle before the 100-day MA at 197.00 comes into focus.

GBP/JPY Daily Chart, August 27, 2024

Source: TradingView (click to enlarge)

Support

• 189.56
• 188.40
• 185.00

Resistance

• 192.00
• 195.00
• 197.00

EUR/GBP

The technicals on EURGBP point to the pair setting up for a retracement sometime soon. The pair is currently on a five-day decline as Sterling appreciated while the Euro faced pressure.

EUR/GBP is edging lower towards the lows of late July before the 250 pip rally higher.The RSI is currently languishing between the neutral area and the oversold area. Any move lower from here could push the RSI into oversold territory.

0.8400 is also a key area of multi-month support which could be a factor and might be a hurdle too far at this stage.

A move higher from here will leave price having to navigate past the 50-day MA first at 0.8472 before the 100-day MA at 0.8500 comes into focus.

EUR/GBP Daily Chart, August 27, 2024

Source: TradingView (click to enlarge)

Support

• 0.8400
• 0.8342
• 0.8247

Resistance

• 0.8472
• 0.8500
• 0.8584

The Japanese yen has edged lower on Tuesday. In the European session, USD/JPY is trading at 144.76, up 0.17% on the day at the time of writing.

BoJ Core CPI slips to 1.8%

Is Japanese inflation falling? On Tuesday, two inflation indicators pointed to a deceleration in inflation in July. BoJ Core CPI, which is closely monitored by the Bank of Japan, dropped to 1.8%, down from 2.1% in June and its lowest level in three months. The Services Producer Price Index dropped to 2.8%, down from a revised 3.1% in June.

Japan’s inflation has been moving higher, which has supported the case for another rate hike from the Bank of Japan. The central bank has projected that inflation will hover around its 2% target until 2027. Today’s inflation releases could be temporary blips but if the next inflation reports also indicate that inflation is heading lower, it could complicate the BoJ’s plans to gradually normalize its ultra-loose policy.

The International Monetary Fund said on Friday that it supports the BoJ’s move to normalization and that the speed of further rate hikes will be ‘very data-dependent”, with a focus on inflation, wage growth and inflation expectations. We’ll get a look at Tokyo Core CPI on Friday, which is expected to remain unchanged at 2.2%.

The Jackson Hole Symposium was “mission accomplished” for the markets as Federal Chair Jerome Powell signaled that the Fed was ready to cut rates. Powell didn’t specify the September meeting as the kickoff for rate cuts, but the markets are confident that the Fed will cut by a quarter-point at the Sept. 18 meeting.

The US releases a key employment report on Sept. 6 and Goldman Sachs has said that if the jobs report is soft again then the Fed could respond with a 50-basis point cut, while a strong jobs release would support a 25-bps move.

USD/JPY Technical

• USD/JY is testing resistance at 144.98. Above, there is resistance at 145.42
• There is support at 144.21 and 143.77

In a panel discussion today, ECB Governing Council member Klaas Knot emphasized the need for a more restrictive fiscal policy to support the central bank's efforts in curbing inflation.

Knot stated that the ECB has "assumed most of the burden of bringing inflation down," but he added, "A more restrictive fiscal policy would have been desirable."

He also highlighted the impact of interest-rate hikes on debt-servicing costs, suggesting that these should be offset by higher primary fiscal balances.

Knot pointed out that increased spending by the European Union should be balanced by reduced fiscal space at the national level, noting, "After all, the national and European taxpayer is ultimately one and the same person."

• BoE Governor Bailey’s speech at the Jackson Hole Symposium reiterated BoE’s cautionary dovish monetary policy stance.
• Short-term interest rate markets are likely to price in a shallower and slower interest rate cut cycle in the UK.
• The potential further widening of the 2-year yield premium of UK gilts over US Treasury notes may support a further upmove in the GBP/USD.
• Watch the 1.3000 key medium-term support on the GBP/USD to maintain its ongoing medium-term uptrend phase.

The British pound sterling (GBP) has been the top performer among the major currencies, strengthening by 3.9% year-to-date as of 27 August against the US dollar.

The current strength of the GBP has been supported by a cautious dovish monetary policy stance adopted by the Bank of England (BoE) after its first 25 basis points (bps) cut on its policy Bank Rate in its recent August meeting to bring it down to 5% from a 16-year high of 5.25%, that had been left unchanged for a year.

BoE may adopt a shallower and slower interest rate cut cycle

BoE’s cautionary stance was reiterated last Friday, 23 August Jackson Hole Symposium where BoE Governor Bailey stated that further interest rate cuts in the UK should not be rushed because it was still too soon to be sure inflation was beaten even though longer-term inflationary pressures were easing,

Hence, going forward, it is likely to draw a wedge between US and UK interest rates where short-term interest rate markets are likely to price a shallower and slower interest rate cut cycle in the UK.

Bullish breakout after one year of range consolidation

Fig 1: GBP/USD medium-term trend as of 27 Aug 2024 (Source: TradingView, click to enlarge chart)

The price actions of the GBP/USD staged a bullish breakout last Tuesday, 20 August after it consolidated for almost one year of “Symmetrical Triangle” range configuration since 13 July 2023.

In addition, it has also cleared above its former long-term secular descending trendline resistance that capped prior rallies since July 2014.

Even though the daily RSI momentum indicator is now hovering at an overbought condition level of 74, there is no bearish divergence signal being flashed out at this juncture which suggests lower odds of a bearish reversal scenario for the GBP/USD.

Intermarket analysis also supports the potential start of a medium-term uptrend phase for the GBP/USD. The 2-year sovereign yield spread between UK gilts and US Treasury notes has staged a bullish breakout above its former major descending trendline resistance from 12 July 2023.

This observation suggests that the 2-year yield premium of UK gilts over US Treasury notes may widen further from 0.18% printed at this time of the writing which in turn may make UK fixed-income instruments more attractive over US.

Watch the 1.3000 key medium-term pivotal support on the GBP/USD with the next medium-term resistances coming in at 1.3400/3505 and 1.3750 next (see Fig 1).

On the other hand, a breakdown below 1.3000 invalidates the bullish tone to see another round of choppy corrective movements to expose the next medium-term supports at 1.2860 and 1.2635 (also close to the 200-day moving average).

• AUDUSD holds in tight range near its recent high
• RSI and MACD point down

AUDUSD has been stuck within a range bound pattern in the near term defined by the 0.6794 and 0.6760 levels, although the price has been maintaining a bullish tendency since the beginning of August.

However, the technical oscillators suggest a potential downside retracement. The RSI is ticking lower above the neutral 50 level, while the MACD is sliding beneath its trigger line in the positive area.

If the price continues its recent rebound from 0.6760, the next resistance could come from the previous high of 0.6797 before resting near December's peak of 0.6870.

Alternatively, should the price reverse back lower, the 20-period simple moving average (SMA) at 0.6750 and the ascending trend line near 0.6740 could act as the first levels of defense. Further declines could then push the market towards the 50-period SMA at 0.6715, ahead of the 0.6700–0.6690 region, which encapsulates the 23.6% Fibonacci retracement level of the upward move from 0.6347 to 0.6797.

In brief, AUDUSD looks positive as long as it stands above the uptrend line and the 200-period SMA in the 4-hour chart. 

As shown on the XNG/USD chart, today, the price of natural gas fell below $2.16 for the first time since 8 August.

Bearish sentiment is being driven by the fact that: → This is the last week of summer. Gas consumption typically decreases in mid-September as the use of air conditioning declines; → Gas storage levels are abundant. According to Reuters, current stock levels exceed the seasonal average by 12%.

A technical analysis of the XNG/USD chart provides several arguments suggesting that bears hold the upper hand in the market:

→ Price action is forming a descending channel, shown in red. The upper boundary of the channel acted as resistance, with the price forming a bearish rounding reversal pattern (as indicated in blue).

→ After a large bearish candle on 22 August, the resistance level at $2.24 became more significant.

→ Support lines, forming a fan shape, are being broken one by one, with increasingly shallow angles indicating weakening demand.

Nevertheless, bulls have an opportunity to turn the situation around by using support from the trendline (shown in yellow) at least in the short term.

However, in the longer term, if the supply-demand balance remains unchanged, there is reason to believe that the price of natural gas on the XNG/USD chart may continue its downward trend within the red channel.

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Gold prices have recently dipped to 2507 USD per troy ounce but are poised for a potential rebound due to increased demand for safe-haven assets amid escalating conflict in the Middle East. Additionally, anticipations of monetary policy easing by the US Federal Reserve in September further bolster gold's outlook.

Monetary Policy and Market Dynamics

Last week, Fed Chair Jerome Powell indicated a likely rate cut as US inflation approaches the target of 2%, with a particular focus on the softening employment market impacted by prolonged high interest rates. Mary Daly of the FRB San Francisco echoed Powell's sentiment, advocating for policy adjustments which support a favourable environment for gold as lower interest rates typically decrease the opportunity cost of holding non-yielding assets like gold.

Geopolitical Influences

The situation in the Middle East, particularly between Israel and the Gaza Strip, remains volatile. Despite initial hopes for a peace agreement facilitated by US diplomatic efforts, the conflict has reignited, driving up demand for gold. Such geopolitical uncertainties typically enhance gold's appeal as a protective investment during times of crisis.

Technical Analysis of XAU/USD

Gold exhibited a downward impulse to 2470.77 USD, followed by a correction to 2526.00 USD. It is forming another downward wave targeting 2480.20 USD, expecting to break this level and potentially move towards 2435.55 USD. The MACD indicator, with its signal line positioned above zero but pointing downward, supports this bearish scenario.

After completing a corrective structure to 2526.00 USD, gold is expected to form a downward wave to 2500.00 USD. Upon reaching this target, a brief rise to 2513.33 USD might occur before continuing downward to 2480.20 USD. This pattern suggests only half of the anticipated downward trend. The Stochastic oscillator, near 50 and expected to rise to 80, indicates potential short-term gains before resuming the downward movement.

Summary

The interplay of easing monetary policies by the Fed and increasing geopolitical risks in the Middle East creates a complex but potentially favourable backdrop for gold prices. Investors might see gold as an attractive investment, a safe-haven asset and a hedge against potential currency devaluation and inflation uncertainties. These factors and technical indicators suggest a volatile but upward potential trajectory for gold prices in the near term.

Gold edges lower on Tuesday morning after rally in past two days reaching levels ticks away from new record high ($2531).

Traders show hesitation, keeping the price in extended consolidation, but demand for yellow metal remains strong, mainly due to weaker dollar on Fed rate cut signals and growing geopolitical tensions in the Middle East.

Although September rate cut has been confirmed, the size of cut is still unclear with 70% expectations for 25 basis points cut and 30% for 50 basis points, which keeps traders at a slower pace and awaiting next economic data from the US to get more details.

Immediate bias to remain firmly with bulls while the price stays above $2500 support zone (psychological / rising 10 DMA).

Deeper pullback below $2500 should be contained above $2470/64 (Aug 22 higher low / ascending 20DMA) to keep bulls intact and offer better levels to re-join bullish market.

US Aug Consumer Confidence will be in focus as a top economic release from the US today.

Res: 2520; 2526; 2531; 2547.
Sup: 2500; 2494; 2470; 2464.

Market picture

The crypto market failed to grow steadily, with total capitalisation falling 1.6% to $2.21 trillion. This is a slight correction following the unimpressive performance of the equity market. The Sentiment Index fell back into neutral territory, losing 7 points on the day to 48.

Bitcoin fell below $63K, losing 1.4% in 24 hours and dropping below its 200-day moving average. It’s too early to tell if this line has become resistance.

Ethereum fell 1.7% to $2690, remaining in the lower half of the range from the July highs to the August lows. The $2800 area served as strong support on the dips from April to July this year and now provides important resistance.

Toncoin overnight approached the $5 level, which was the turning point for the early August and May sell-offs. Although impressive bounces have accompanied the decline, the high volume means that we must remain negative on the coin’s near-term prospects.

News background

According to CoinShares, investment in crypto funds rose by $533 million last week, the largest inflow in five weeks and the third consecutive week of growth. Meanwhile, new Ethereum ETF issuers continue to see inflows, with $3.1 billion in new money for the month, partially offset by a $2.5 billion outflow from Grayscale Trust.

A federal court in the Northern District of California rejected the SEC’s request to recognise digital assets traded on the US crypto exchange Kraken as investment contracts. This is a significant victory for Kraken and cryptocurrency users. The exchange’s general counsel said the SEC will no longer be able to rely on its theory that cryptocurrencies are securities.

The combined market value of stablecoins has reached a new all-time high of $168 billion, a figure that has risen for 11 consecutive months. Dynamo DeFi interprets the trend as a sign of an influx of ‘new money into cryptocurrency’.

Tether has helped 145 law enforcement agencies in 40 jurisdictions recover more than $108.8m in USDT since its launch in 2014, the company said. The USDT issuer has also ‘voluntarily’ blocked more than 1,900 wallets linked to illegal activity.

Luke Dashjr said the decentralised nature of the first cryptocurrency has come under threat. Just two companies now control more than 55% of the BTC network’s global hash rate.

• GBPUSD’s bull run slows down near a familiar resistance area
• Some stability is likely; sellers need a close below 1.3188 to gain control

GBPUSD opened the week with marginal losses after its almost uninterrupted two-week rally was rejected near the key resistance trendline at 1.3229 for the third time.

While the bulls are trying to make a comeback today, the RSI and Stochastic oscillator are both flatlining in the overbought zone, indicating a high risk of a downside correction.

Perhaps, a step below the 1.3180 area, which has been acting as support for the second consecutive day, could confirm additional losses towards the 1.3025-1.3085 zone. If the steep ascending trendline from August’s lows is broken along with the 1.3000 psychological mark too, it could lead to a rapid decline towards the 20- and 50-day simple moving averages (SMA) found between 1.2890-1.2900.

Regarding resistance levels, the ascending trendline from April will be closely watched near 1.3240. A move above it could reach the 1.3300 round level, while higher, the bulls will set their sights near the 1.3400 mark last seen in March 2022.

Overall, following its recent swift appreciation, GBPUSD could undergo profit-taking. However, as long as the pair continues its upward trend in the medium-term picture, investors won’t be concerned unless the price falls below 1.2700-1.2730.