The volatility eased in the foreign exchange market compared to three-weeks turmoil in March. Most of the currency pairs did not have such sharp swings of quotes and trading ranges narrowed back to normal this week. Exchange rates of major and even high-risk currencies recovered part of previous losses versus the US dollar thanks to unseen supportive measures implemented by central banks, especially in terms of unprecedented liquidity injected into the financial system. As a result, the panic buying of the world’s reserve currency, which always plays the role of a safe-haven asset during tough periods for the global economy, settled down.
The British pound strengthened almost +8% or 900 pips, counting from the bottom at 1.1411 charted on March 20. GBP/USD recovered more than 50% of the 8-days plunge that started on March 10. The main question now is whether Sterling will keep recovering towards the long-term moving average at around 1.3000, or will traders see another wave of the sell-off? This article is aimed to provide an in-depth technical outlook for GBP/USD and GBP/JPY currency pairs, trying to answer that question.
First thing first, so we should start with long-term timeframes to analyze the technical sentiment. The weekly chart setup below shows that Sterling has a bearish bias. The Ichimoku Cloud has a bearish continuation pattern as the leading span has a negative surplus, the current rate is below the cloud itself and both Conversion and Base Lines are placed in the correct order to continue the downtrend. There was a bullish upswing last week as the rate tried the water inside the cloud but the bulls failed to hold gains and GBP/USD closed the weekly candle below the cloud. The combination of that factor together with the long shadow of the weekly candle is a powerful signal for shorts with a long-term perspective.
On top of that, the Average Directional Index also has a bearish surplus between the -DI (red) and +DI (green) lines, while the growing ADX mainline points to a comparatively strong momentum. The Chaikin Oscillator bottomed out after the plunge but remained in the distribution territory, which is bearish as well. At the time of writing, GBP/USD was testing the Ichimoku Conversion Line at 1.2306. That’s the only concern for the bears as if the pair failed to close this week below the support curve, then a sideways consolidation might take place. On the other hand, a weekly close below could accelerate the downtrend and increase the selling pressure, according to the technical analysis.
Another chart setup below points to a mixed sentiment with a bearish bias on the daily timeframe. The Fibonacci Retracement tool takes into account the highest daily close and the lowest daily close rates during the recent plunge. The current rate is hovering around the 50% Fibo support, while the daily close rate breached it by several pips on Tuesday, which might have a bearish continuation. The next support level is the 61.8% Fibo and it comes at 1.2110, so short-sellers should consider taking profits around there.
The MACD trend indicator shows a technical uncertainty, which might lead to a directionless trade with a tight range in the near future. The histogram erased all of the gains achieved during the bullish retracement, both lines are at the zero level. However, the 13-days RSI is below the 50% level and descending, which points to a bearish bias in the short-term perspective. More importantly, GBP/USD finished the recent bullish correction below the 55-days simple moving average (see the red arrow on the screenshot). Therefore, the upside swing was nothing but a technical retracement and the pair should resume the downtrend.
The GBP/JPY cross-rate has a similar pattern on the weekly chart (see below), with the only difference that the current rate has already breached the Ichimoku Conversion line and headed towards the psychological round-figure support at 130.00 yens per pound. On top of that, the BB %B indicator did not even reach the middle threshold during the bullish rebound and remained in the bearish zone. Stochastic RSI is extremely close to performing a bearish crossover, which has to lead to more selling pressure in the week ahead. The only positive sign is that the Ichimoku Base Line resistance did not go out of the cloud yet. If that happened, the bearish continuation pattern will be completed and the downtrend could accelerate.
The technical analysis shows that both pairs are under the selling pressure and the recent rebound was nothing but a technical retracement. Moreover, the bullish rally was not strong enough to reverse the downtrend and switch the sentiment. Therefore, we expect GBP/USD and GBP/JPY to keep declining in the medium-term perspective.