GBP/USD Bullish Key Reversal Warns Sterling Selloff May Be Exhausted

• GBP/USD delivers bullish key reversal as gilt rout eases
• Markets pricing at least two BoE hikes this year
• UK wages and inflation data shift into sharp focus
• GBP/AUD tests key downtrend after false downside break

Perfect Storm for Pound Bulls

Monday delivered a near-perfect backdrop for sterling bulls, with easing fiscal fears, another Trump TACO on Iran, hawkish Bank of England rhetoric and an IMF growth upgrade helping trigger a sharp reversal in UK assets after last week’s blowout move in long-end gilt yields.

Calming remarks from Labour leadership hopeful Andy Burnham on fiscal discipline helped ease fears Britain may be heading towards an even looser fiscal regime, while Bank of England rate-setter Megan Greene warned policymakers could no longer afford to simply “look through” successive supply shocks, reinforcing market pricing for further tightening should UK data remain firm.

While the conflict in the Gulf remains the dominant macro driver for sterling against the dollar, for the first time in a while the pound is once again starting to trade on idiosyncratic UK factors too.

BoE Back in Focus

With Burnham’s potential path back to parliament still weeks away and no guarantee he even wins the byelection given Reform’s recent strength in local government elections in the area, the immediate political threat to Starmer looks less pressing for now, creating room for other drivers to influence sterling movements. Increasingly, that may now be the Bank of England reaction function.

Source: TradingView (BST)

That puts this week’s UK data into focus. For the labour market report out Tuesday, average weekly earnings excluding bonuses remains the key release given the Bank’s continued concern surrounding domestically generated inflation pressures, while the unemployment rate will also matter despite lingering questions about the reliability of the survey data.

That’s especially important with markets pricing at least two further Bank of England rate hikes by year-end, leaving incoming data carrying far greater significance for sterling and UK rate pricing during what’s otherwise a fairly quiet week on the macro front.

For the inflation report 24 hours later, attention will be on whether there’s clear evidence higher energy prices are starting to bleed further down supply chains into broader pricing behaviour. That places extra emphasis on the core, services and producer price measures, especially the latter given it will provide signal on pipeline pressures heading towards UK consumers.

Wedged in between the UK data, traders should also keep a close eye on an upcoming speech from influential Fed Governor Christopher Waller, with his views on the inflation impulse hitting the US economy and potential changes to the FOMC’s monetary policy framework, including a possible shift in inflation measurement, of interest to markets.

Gilt Stress Eases for Now

Source: TradingView

Long-end gilt yields look to have stabilised for now, likely reflecting not only the improved news flow surrounding UK politics, but also just how stretched the move higher had become after last week’s relentless selloff.

The underlying concerns surrounding Britain’s fiscal outlook, political instability and inflation risks haven’t disappeared, not by a long shot, but when headlines everywhere start screaming yields are hitting the highest levels since the 1990s, it’s often a decent sign positioning and sentiment may already be nearing an extreme. So far, that’s proven to be the case.

Sterling Eyes Break Higher

Source: TradingView

The outperformance in gilt markets filtered through to sterling on Monday, with GBP/USD ripping higher after trading lower early in the Asian session, helping to deliver a bullish key reversal candle on the daily chart. The pair now finds itself resting on the confluence of the 50 and 200-day moving averages with former support at 1.3450 sitting marginally overhead, leaving them as the immediate levels for traders to focus on.

Given the key reversal warns of upside risks, traders should be on the lookout for a break above 1.3450, allowing for longs to be established with a tight stop beneath for protection. The merits of the setup would improve further if the pair were to break, retest and bounce from 1.3450 before entry. The 100-day moving average is the first level for longs to target, with 1.3500 and 1.3550 the next levels after that given sterling’s track record to gravitate towards big and half-big figures.

Alternatively, if the bullish signal proves false, which remains a genuine risk in this headline-driven environment, a reversal back beneath the 50 and 200-day moving average zone would allow for shorts to be considered once again with a tight stop above for protection, targeting Monday’s low of 1.3304.

The message from the oscillators remains entirely neutral, placing greater emphasis on price action rather than maintaining a strong directional bias.

GBP/AUD Eyes Trend Break

Source: TradingView

With Gulf headlines dominating broader dollar direction, cleaner expressions of shifting UK rate pricing and domestic fundamentals may be more evident against the crosses.

GBP/AUD is one to keep on the radar, reversing hard after a false break beneath the December 2023 swing low last Friday, delivering an engulfing candle that helped herald further gains on Monday. The pair now finds itself eyeing the downtrend from the late March swing high of 1.9400, putting traders on alert for a potential trend break.

The downtrend sits around 1.8775 today with minor resistance located just beyond at 1.8825. If the price were to break the downtrend and hold above the latter, it would allow for longs to be established with a tight stop beneath for protection, targeting the confluence of the 50-day moving average and 1.8950 resistance.

Alternatively, if the pair were to test the downtrend and fail, validating it as resistance, shorts could be considered beneath with a tight stop above for protection, targeting 1.8696 initially and, beyond that, the swing low set last week beneath 1.8550.

Having favoured downside for a prolonged period over recent weeks, the oscillators are now starting to turn more constructive for bulls with RSI (14) breaking its downtrend while holding beneath 50, while MACD looks close to staging a bullish crossover while remaining marginally in negative territory. It’s not a bullish momentum signal yet, but the downside strength that helped drive the pair to multi-year lows has all but evaporated.