Is GBP/USD Able To Extend Recovery?

In a striking twist of incidents, the UK government announced on Monday a U-turn of its latest expensive and unfunded tax cut policy. After the Bank of England’s intervention last week to calm the bond market, the British pound rallied and was able to consolidate for a while.

While the Prime Minister’s credibility has been impacted, investors welcome the move towards a less irresponsible fiscal stance.. Today’s move has led to another development as the pound’s recovery from all-time lows against the US dollar continues. So where could the GBP/USD exchange rate go next, now that it has recovered almost all lost ground since the mini-budget’s announcement?

Today’s announcement fueled the GBP/USD pair’s rally. The exchange rate recovered from below 1.04 a week ago to close the previous week just shy of 1.12. At the time of writing, the pair is trading at 1.1312.

Despite the massive rally, more progress is expected. The recent consolidation looks like a continuation pattern suggesting more upside. More precisely, a pennant formation has the measured move pointing to 1.18 and beyond. Technical traders value the pattern due to the strong upside move once the consolidation ends.

Besides the news of the UK, the softening of US data also helps. Earlier today, news out of the United States showed that the manufacturing sector softened in September.

Moreover, the employment component shrank at a faster pace, suggesting that the labor market may ease. As such, traders increased their bets that the Fed would slow down its tightening cycle, and so the US dollar traded with a weak tone in response.

Summing up, the GBP/USD bullish case should be supported by both UK and US data. From the UK, the U-turn in the fiscal policy brings back confidence, which is beneficial to the pound. On the US front, poor economic data could impact the US dollar’s performance as Fed’s next rate hikes are carefully eyed.

So, the British pound surged more than 1% at the start of the week amid US dollar weakness and risk-on mood in financial markets. However, most of sterling’s gains could be attributed to idiosyncratic developments on the fiscal front in UK.

The GBP/USD is broadly seen as having momentum to run higher and extend its recovery in the near term, particularly considering how oversold the currency became in recent weeks.