GBP/USD outlook: Impressive rebound arrives at key technical test

• Cable extends impressive corrective bounce
• Waller keeps inflation centre stage
• Markets continue to unwind Fed tightening bets
• Resistance now stands directly overhead

Cable continues to motor higher, defying a macro backdrop that was broadly dollar-supportive on Monday. Fed Governor Christopher Waller reiterated that inflation remains the Fed's primary concern, while the latest ISM services PMI pointed to continued resilience in the world's largest economy. Yet neither was enough to derail sterling's advance, with GBP/USD approaching a major technical test.

Burnham calms fiscal concerns

Part of sterling’s recent resilience may reflect improving sentiment towards the UK fiscal outlook. While UK prime minister-in-waiting Andy Burnham's commitment last week to stick to the country's existing fiscal rules didn't mark the exact bottom in cable, it came close. Since then, GBP/USD hasn't posted a single down session, with the pair steadily extending its recovery.

The move may reflect relief that Burnham's policy agenda is shaping up to be less fiscally expansionary than some had feared. With concerns lingering over the UK's fiscal trajectory, his commitment to maintain budget discipline may have appeased traders for now, helping underpin sterling not just against the dollar but also the major crosses.

Hawkish Fed rhetoric, softer pricing

The ongoing resilience in cable was all the more notable given developments in the US on Monday. Influential Fed Governor Christopher Waller argued that risks facing the Fed had "completely flipped around", saying the labour market had stabilised while inflation had picked up. Having advocated rate cuts a year ago because of concerns over employment, Waller indicated inflation was now the dominant consideration when thinking about policy.

The ISM services PMI for June only reinforced the narrative of US economic exceptionalism. The headline index held comfortably above the 50 level separating expansion from contraction, with employment returning to expansion after three months of contraction while new orders remained firm.

Source: TradingView

In other regimes, that combination would have been expected to support the dollar. Instead, markets continued to pare Fed tightening expectations, as seen in the graphic above, with pricing over the next 12 months falling to around 33.5 basis points, down from around 43 basis points only a week ago.

Attention now turns to Wednesday's release of the June FOMC minutes. Given nine of the 18 policymakers who submitted economic projections expected at least one rate hike this year, including six looking for multiple increases, the tone is likely to be hawkish. But that's should be entirely expected. With energy prices having retraced sharply and market-based inflation expectations continuing to ease since the meeting, traders may view the minutes as somewhat dated, leaving next week's US CPI report as the more important event for the dollar.

Recovery meets resistance

Source: TradingView

From a technical perspective, cable's recovery has seen it arrive at an important juncture, sitting just beneath a confluence of the 50, 100 and 200-day moving averages, along with a minor downtrend running from the highs set back in the middle of May. After what's been a decent run over the past fortnight, that creates a tough test for the bulls.

Looking at the oscillators, momentum has shifted back in favour of the bulls, but it's not yet a definitive signal. RSI (14) has pushed above 57, while MACD has crossed above its signal line from below and is now motoring towards positive territory. Together, they suggest momentum may be in the early stages of swinging back in favour of longs.

Importantly, though, the move over the past fortnight should be viewed as a corrective bounce rather than the beginning of a new, longer-lasting uptrend. While the bounce has been impressive, the pair has yet to take out the sequence of lower highs. Until the confluence of resistance overhead gives way, there's little to suggest the broader trend has changed.

Should cable break above the resistance zone, ideally followed by a successful backtest and bounce or a close above it, it would strengthen the case for a move towards 1.3500, a level that has repeatedly acted as both support and resistance in recent months. A break above there would shift the focus to the May high of 1.3659. On the downside, 1.3325 is the first level to watch. Having acted as both support and resistance recently, the pair has so far managed to hold above it following last week's breakout.