How Much Further Can Cable Stretch?

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GBP/USD, known as "cable," has surged to levels not seen since early 2022, prompting questions about how much further it can climb. As both fundamental and technical factors come into play, we take a look at whether the recent gains are sustainable or if a correction is looming.

Fundamental Drivers of GBP/USD Strength

Three key fundamental drivers have contributed to the GBP/USD's impressive rally:

1. Diverging Monetary Policies: A significant factor in the pound's strength is the contrasting stance between the Bank of England (BoE) and the US Federal Reserve (Fed). While Fed Chair Jay Powell has hinted at the potential for rate cuts, BoE Governor Andrew Bailey has taken a more cautious approach, indicating that it’s still too early to declare victory over inflation in the UK.

2. Strong UK Economic Data: The UK has recently posted stronger-than-expected economic numbers, including a 0.6% GDP growth in the second quarter and robust private sector activity in August. These positive figures have fuelled optimism about the UK economy's resilience and potential for continued expansion, adding support to the pound's upward momentum.

3. Political Stability and Optimism: The anticipation of political stability under the new Labour government, combined with hopes for growth-enhancing planning reforms, has contrasted to the US which has a closely fought election coming up in November.

Technical Analysis: Evaluating the Rally’s Staying Power

After breaking out from the descending channel that formed during July, GBP/USD has been on quite a run. The pair has put in a near-perfect 500-point rally, breaking above both the summer swing highs and the July 2023 highs.

GBP/USD Daily Candle Chart

Past performance is not a reliable indicator of future results

Having come so far so fast, let’s take a look at how much further cable GBP/USD has to run. If we add the RSI indicator, we can see that RSI moved into overbought territory as the market was breaking above the July 2023 highs. While the market has continued to make higher highs, the RSI failed to do so—creating bearish divergence and indicating that the market may be overbought.

GBP/USD Daily Candle Chart with RSI

Past performance is not a reliable indicator of future results

However, a closer look at recent price action on the hourly candle chart reveals that the market is currently holding firm—finding support at hourly swing lows and not showing any immediate signs of exhaustion.

GBP/USD Hourly Candle Chart

Past performance is not a reliable indicator of future results

Scenarios

Bullish Scenario: Momentum and trend are firmly in favour of trend continuation. If the market builds a solid base of support at the broken July 2023 highs, this could create a platform for another leg higher. Positive UK economic data or dovish signals from the Fed could further strengthen the bullish case.

Bearish Scenario: On the other hand, bears should keep a close eye on the developing RSI divergence, which signals that the market might be overextended. A break back below the July 2023 highs could trigger a deeper retracement.

Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.

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