GBP/USD bulls in control but face a wall of 4-hour resistance

At 1.2270, GBP/USD pair trades on the bid between 1.2239 and 1.2324. The price is currently higher by 0.24% and correcting from last week’s drop from 1.24. Overall, the prevalent market sentiment tone is risk-on and positive for the pound with the softer US dollar despite a focus on higher global rates and central banks.

The risk-on mood is benefitting the pound as the US dollar loses its safe-haven appeal, down below the 105 level. The Dollar Index trades at 104.41 within a range of 103.938 and 104.536. Following last week’s retreat in equities, there has been some deal hunting on Wall Street in stocks as investors move in on the energy and tech sectors, dragging the benchmarks higher in line with a broader global bid in equities.

European shares also closed higher for a second consecutive day on Tuesday. The Stoxx Europe 600 gained 0.35%, London’s FTSE 100 added 0.42%, France’s CAC rose 0.75% and Germany’s DAX edged up by 0.20%. The Swiss Market Index was off 0.06%. On Wall Street, all sectors in stocks are in the green and the Dow Jones Industrial Average jumped is now over 2% higher, with S&P 500 up 2.56% to 3,761 and the Nasdaq Composite 2.8% higher.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.3%, moving higher from a more than five-week low and set for its best day in around two weeks. Japan’s benchmark Nikkei average gained 2.22%.

With all of the positive action in the markets, the elephant in the room stays with higher risks of a global slowdown, and specifically, UK growth fears will remain a thorn in the side of the pound. Nevertheless, net short GBP positions have dropped back for a third consecutive week in the run-up to the June 13 BoE policy meeting. The hawkish tone by some MPC members has been GBP supportive.

The BoE is likely to step up the intensity of its tightening, analysts at ANZ Bank argued. ”MPC member Catherine Mann has noted that demand is strong and that she voted for a 50bp rate rise at last week’s meeting.”

The BoE has noted that the pace of rate increases may well accelerate in the months ahead as inflation is poised to move to double digits. In sum, central bank hawkishness continues to broaden, and that’s likely to keep risk markets fragile and weigh on global growth prospects in the short to medium term.

The bullish scenario identifies the price imbalance between the current resistance, 1.2340, and prior consolidation near 1.25 the figure that occurred before the significant price drop into test 1.19 the figure. On the downside, the bears would be in control on a break of the support zone that consists of both horizontal and dynamic support around 1.2250 and 1.2180. This could lead to mitigation of the price imbalance between 1.2172 and 1.1998.