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Summary: Following a significant market sell-off due to U.S. initial jobless claims data on Thursday, the U.S. dollar is licking its wounds. Meanwhile, GBPUSD is holding at a recent range high of 1.2550. The Relative Strength Index (RSI) suggests a pullback for the asset before the next upward movement.

Fundamentals

With uncertainty surrounding what decision the Fed will make at its policy meeting next week, the British pound strengthened on Thursday, influenced by the weakening U.S. dollar.

The UK's labor market report from the Office for National Statistics will be released next Tuesday. Market expectations of a rate hike by the Bank of England may need to be lowered, but whether this will provide more clarity remains questionable. This means that the BoE will continue to be concerned about the upward spiral of wage prices and may still consider it necessary to raise interest rates. This is a short-term supportive factor for the British pound. But given that rate expectations have already gone a long way, the upside potential at this point should be limited.

This week, unexpected rate hikes by the Reserve Bank of Australia and the Bank of Canada have made the market's expectation of whether the Fed will choose to raise rates by another 25 basis points even more uncertain. This uncertainty extends to the policy path of the BoE as well.

We think it is less likely that the BoE will raise rates before the end of the year, as we assume that inflation will significantly decrease in the coming months, providing the Bank with room to end the rate hike cycle earlier. This means that the market will have to lower its expectations of the BoE, which will put downward pressure on the British pound.

After a "false" breakout and upward movement in the past two days, new strength is emerging in the upward trend for the GBPUSD pair, while it requires the price to close above the level of 1.2493 to generate new directional momentum.

Although the Relative Strength Index (RSI) suggests a pullback before the next upward movement, in the daily timeframe, bullish momentum supports further upward action. However, if the bulls fail to significantly break above 1.2570, it will weaken the recent structure and maintain vulnerability to the downside.

Technical Analysis

On Friday, GBPUSD bulls were in consolidation after the previous day's biggest one-day gain since early March.

Previously (in early June), the RSI above the 50.0 level was a major factor in the recent pullback in the GBP, but the bullish MACD and the two-week-long uptrend channel keep the bulls hopeful. As such, the latest current rally remains elusive unless it continues to stay within the ascending channel, currently between 1.2600 and 1.2410.

That said, the possibility of a short-term correction toward the 50-day SMA around 1.2420 cannot be ruled out. Breaking below this level would potentially lead to a quick decline toward the May low near 1.2310.

Meanwhile, a break above the peak of the channel at 1.2600 could be a concern unless the pair is able to quickly break above the annual high set in May around 1.2680.

Overall, the GBPUSD remains under the attention of the bulls, but a pullback cannot be ruled out. We are more inclined to see further upside before a significant retracement ahead of the upcoming Federal Open Market Committee meeting next week. In terms of trading strategy, it is recommended to not chase long positions and focus on going short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.2630

Target Price: 1.2328

Stop Loss: 1.2772

Valid Until: 2022-06-23 23:55:00

Support: 1.2545, 1.2499, 1.2393

Resistance: 1.2641, 1.2669, 1.2680