GBP/USD Forecast: Long-Term Resistance and Economic Uncertainty Weigh on the Pound

The GBP/USD pair is currently navigating a complex landscape shaped by long-term technical resistance and a series of economic challenges. With a 16-year trendline acting as a formidable barrier, the pair faces bearish pressure despite recent attempts to rally. Factors such as weak UK industrial performance, a widening trade deficit, and evolving US monetary policy expectations have intensified the downward momentum for the pound. This article explores the critical resistance levels, technical patterns, and economic drivers that are influencing the outlook for GBP/USD, with a focus on whether the pair can break through or face further declines.

GBP/USD Faces Strong Resistance At 16-Year Trendline

The long-term monthly chart for GBP/USD shows that the overall trend remains bearish. This bearish pressure is highlighted by a 16-year trendline that extends from the November 2007 high of $2.1161. This trendline, together with the lower trendline, forms a falling wedge pattern. However, since this pattern appears on the long-term chart, the broader outlook still suggests a bearish trend. This long-term trendline has been tested multiple times, as seen in the black circles on the chart. Resistance levels are observed at the July 2014 high of $1.7191 and June 2021 high of $1.4247, with each instance leading to sharp declines, marking new historical lows. These types of highs, followed by significant lows, confirm that the long-term trend for GBP/USD remains bearish.

The long-term trend is also supported by the downward movement of the 20, 50, and 100 EMAs. However, the recent rally in GBP/USD over the past few months has encountered strong resistance near the long-term trendline, suggesting that prices may start to fluctuate around this level. Although the price closed above the long-term trendline in August 2024, two consecutive monthly closes above this level, along with a break above the weekly consolidation, are required to confirm a breakout. Thus, the August 2024 rally and monthly close are still in question, and this area is being treated as a resistance zone for GBP/USD. Furthermore, the RSI is approaching a level historically associated with significant price drops.

Evaluating Key Resistance Levels for GBP/USD

To further understand the long-term outlook for GBP/USD, the weekly chart below illustrates the same long-term trendline discussed in the previous chart. This trendline highlights the significance of the current level for the pair. It is observed that the price has closed above the long-term trendline on a weekly basis. However, since this area serves as long-term resistance, two consecutive monthly closes above this level are needed to confirm a breakout. Until a confirmed breakout occurs, the price has the potential to drop significantly lower. Since this is the first attempt at breaking through, the price may fail at this level and continue to move downward. The RSI is also currently trading at a level where the price has historically initiated a correction on the weekly chart. If the pair begins to correct lower, the $1.25 to $1.26 level remains a strong support zone, as indicated by the red trendline in the chart below.

The chart above also indicates a risk of a breakout from this long-term trendline as the US dollar weakens due to the Federal Reserve’s rate cut expectations this week. Therefore, if GBP/USD fails to break below $1.2800 and instead moves above $1.33, it may signal a long-term technical breakout and the continuation of upward momentum in the pair.

The chart below presents the short-term outlook for GBP/USD, showing that the price has been consolidating between the blue channel lines for the past 12 months. However, the price has also formed an ascending broadening wedge within this channel, indicating that volatility remains high. The pivotal long-term resistance is also highlighted in the daily chart, which shows that the price is currently correcting from this critical junction toward the lower support band of the ascending broadening wedge. The RSI is currently at the midline, suggesting that the pair may fluctuate or rebound in the short term, though the overall trend remains bearish.

US Inflation and UK Industrial Weakness Weigh on Market Sentiment

The bearish pressure on GBP/USD was reinforced following the release of US inflation data, which significantly influenced market sentiment due to mixed signals. While headline inflation declined, the core Consumer Price Index (CPI), which excludes volatile components like food and energy, held steady at 3.2%. Both the overall CPI and core CPI saw monthly increases that exceeded market expectations, prompting speculation that the US Federal Reserve might reconsider its interest rate strategy. As a result, traders have lowered the probability of a more aggressive 50-basis-point rate hike by the Fed, with the current market consensus suggesting an 87% chance of a smaller, 25-basis-point hike. This shift in US monetary policy expectations has direct implications for the GBP/USD pair.

On the other hand, disappointing GBP/USD data further weighed on the pound. Industrial production fell by 0.8% month-over-month (m/m), reversing the previous month’s gains and falling well short of the anticipated 0.3% growth. On an annual basis, industrial production declined by 1.2%, compared to expectations of a 0.2% drop. Manufacturing activity also showed weakness, contracting by 1.0% m/m and 1.3% year-over-year (y/y). These figures highlight ongoing challenges in the UK’s industrial sector, adding to the downward pressure on the pound. With such weak data, market sentiment remains uncertain about the UK’s growth prospects, further eroding confidence in the pound against the dollar. However, the Bank of England (BoE) is expected to provide some support for the pound by limiting rate cuts to no more than 50 basis points by the end of the year, which could help stabilize the GBP/USD pair in the near term.

Additionally, the UK’s widening trade deficit has exacerbated the economic challenges facing the pound. In July, the deficit increased to £20 billion, up from £18.9 billion the previous month. Expectations that falling energy prices would help reduce the trade gap to £18 billion did not materialize. This larger-than-expected deficit puts further strain on the UK economy and raises concerns about the pound’s potential to rally against the dollar. Historically, the trade balance has been a key factor influencing exchange rates, and a widening deficit typically exerts downward pressure on the GBP/USD pair.

Overall, the GBP/USD pair faces multiple headwinds, ranging from weak UK economic data to shifting expectations surrounding US monetary policy. While BoE may try to offer some relief by limiting future rate cuts, the overall outlook for the pound remains bearish in the short term. However, if the pair fails to break below $1.2800 and continues higher after the Fed meeting this Wednesday, it may maintain the upward trend.

Bottom Line

In conclusion, the GBP/USD pair continues to face significant bearish pressure, driven by long-term technical resistance and a host of economic challenges. The 16-year trendline, which has been tested multiple times, remains a key level of resistance, with recent rallies failing to confirm a breakout. Weak UK industrial data, a widening trade deficit, and shifting US monetary policy expectations have further eroded confidence in the pound. While some short-term relief may come from the Bank of England’s monetary policy, the broader outlook for GBP/USD remains bearish, with potential for further declines in the near term. As long as the GBP/USD remains below $1.3266, the potential for downward movement remains high. A break below $1.2800 will likely continue the downward pressure. As the Federal Reserve announces its interest rate decision on Wednesday if GBP/USD fails to break below $1.2800 and instead breaks above $1.3266, the potential for a long-term rally will increase.