GBP/USD rebound reflects an unwinding of oversold conditions rather than the start of a sustained uptrend, with gains likely capped near 1.3235. The pound to dollar exchange rate (GBP/USD) reached its lowest level since April last week at 1.3010, but has since recovered to 1.3170.
The recovery is shallow and lacks the vigour that would normally be associated with a bottoming pattern, leaving us wary of a continuation of the selloff.
This is why we would characterise the current rally as a mean reversion, and not the start of a renewed push higher.
The pair looks to be recovering from the oversold conditions seen at the start of the month, the culmination of the steady selling pressure seen through the course of October.
The RSI – lower panel in the chart – had fallen below 30, which triggers caution and indicates that those oversold conditions must unwind.
Exchange rates tend to mean-revert, and we are seeing that in GBP/USD. The week ahead forecast looks for that to play out a little further, targeting a move to the 21-day exponential moving average at 1.3235.
Above: GBP/USD looks to be eyeing a return to the 21-day EMA (blue line). Note the bounce out of oversold on the RSI in lower panel.
However, while below this EMA the pair is in a downtrend and the relief could attract more sellers, ready to target new multi-month lows.
1.3010 is the new post-April low, and below here is a potential support region; the 50% Fibonacci retracement of the Q1-2025 rally.
How far GBP/USD can travel will depend on Tuesday’s UK labour market data, where the unemployment rate is expected to have fallen to 4.9% in October from 4.8% in September, owing to rising unemployment and inactivity.
A more severe deterioration in the headline employment numbers would trigger a selloff in the pound, undermining our tactical expectation for a short-term recovery.
Also, keep an eye on the wage figures, as this is closely associated with inflation. The figure to beat is 4.6%.
Quarterly GDP is due Thursday, where the consensus looks for a 0.2% increase in Q3. The UK economy has actually been doing OK this quarter, according to the PMI surveys and retail sales data.
This means a beat on expectations can’t be ruled out. If it happens, then GBP/USD can end the week above 1.3235.
Stateside, there will be no official U.S. data owing to the government shutdown, which deprives us of a previously scheduled inflation data release.
This is one of the two marquee economic calendar events in any given month, the other being non-farm payroll data.