Why GBPUSD's rally could lead to a downfall

– ECB President Lagarde’s hawkish comments have dragged the pound higher.

– BOE’s Bailey is set to cool expectations with potential recession warnings.

– The four-hour chart shows that GBP/USD is entering overbought territory.

GBP/USD’s short-term bullishness looks like a selling opportunity – the currency pair has been extending its gains, somewhat influenced by the strengthening euro, which got a boost from ECB President Christine Lagarde.

She said that the bank could raise rates by 50 bps by September, a relatively aggressive timeline. There is a feeling that central banks are catching up with the hawkish US Federal Reserve and raising rates quickly.

The ECB’s determination is boosting the euro and also dragging the pound higher on the way. But is it justified?

Recession warnings

Later in the day, Bank of England Governor Andrew Bailey is set to speak about monetary policy, and he will likely reiterate his stance that the BOE is ready to tighten its policy to curb inflation. We know that another 50 bps or so of rate hikes are coming.

On the other hand, Bailey warned that price shocks could already send the British economy into recession, The cost-of-living crisis is, therefore, self–correcting. Higher prices curb expenditure, lower growth, raise unemployment and eventually push inflation lower. That means the scope for the BOE to further hike rates is limited.

My analysis above implies that if Bailey merely repeats his warnings – if so the current upside move of the pound could be reversed.

GBPUSD Technical Analysis

The technicals back it up. Initially, they give GBP/USD scope to rise toward 1.2640, May’s high, but not to the next big round level at 1.27. The 4h-RSI is almost at 70, and moving some 100 pips from current levels would put it in overbought territory. There is a greater chance of a climb down to support at 1.2545 than an upside move.

Source: FXStreet – Yohay Elam

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