The GBP/USD exchange rate continued its strong surge this year, and is hovering at its highest level since February 2022. It has jumped by almost 30% from its lowest point in 2022 and 10% from the year-to-date low. This article explains why the GBP to USD exchange rate will soar by 10% in the next few months.
GBP/USD has formed a cup-and-handle pattern
The first main catalyst will be the cup-and-handle chart pattern on the daily chart. This is a common pattern made up of a rounded bottom and some consolidation. In most cases, this pattern is one of the most bullish patterns in the market.
The price target of this pattern is established by first measuring the cup’s depth, which in this case is almost 10%. One then measures the same distance from the cup’s upper side. By doing this, the target comes in at 1.4797, which in this case, would push it to the highest point since January 2016.
The other highly bullish case for the GBP/USD pair is that it formed a golden cross pattern on the daily chart. This is a common pattern, which happens when the 50-day and 200-day moving averages cross each other. The pair always surges whenever this cross happens.
On top of this, top oscillators like the Relative Strength Index (RSI) and Stochastic have all pointed upwards. This means that the pair has the momentum it needs to keep going up, a move that will be confirmed when it rises above 1.3430. A drop below the psychological point at 1.300 will invalidate the bullish outlook.
US Dollar Index inverse C&H pattern
The other reason why the GBP/USD pair may keep soaring is that the US Dollar Index may keep falling in the coming months.
While the GBPUSD pair has formed a C&H pattern, the DXY has done the opposite, as the chart below shows.
This chart shows that the US Dollar Index peaked at $110.16 earlier this year and then pulled back to a low of $97.95 after the Liberation Day speech. A closer look at this chart shows that it has formed a rounded top in the past few months.
It also attempted to bounce back, reaching a high of $101.95 last week. This rebound was part of the handle section. By measuring the depth of this cup, we can estimate that the dollar will crash to $90 later this year. A greenback plunge will likely lead to a higher GBP/USD rate.
US credit rating downgrade, UK inflation data
The GBP/USD exchange rate will continue soaring because of the underlying economic factors. First, the US has lost its Triple A credit rating, which may make assets in the country less appealing over time. However, the ongoing fear of the dollar losing its relevance are a bit exaggerated.
Second, there is a likelihood that the Bank of England (BoE) will maintain higher interest rates for longer as inflation soars. The most recent data showed that UK inflation surged to 3.5% in April from 2.6% a month earlier. Core inflation, which excludes the volatile food and energy products, rose from 3.6% to 3.8%, while the retail price index soared to 4.5%.
Higher UK inflation rate will make it hard for the BoE to cut interest rates again this year. On the other hand, analysts anticipate that the Fed will start cutting in September this year, leading to a Fed and BoE divergence.
The GBP/USD pair will also rise after the UK reached a preliminary deal with the United States. That deal removed some of the most sensitive tariffs. Also, the UK and the EU have reset their post-Brexit relations.
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