- GBP/USD bears looking for a downside continuation to daily support, 1.3785.
- US dollar remains in the top spot on hawkish Fed and anticipation of tapering.
GBP/USD is stabilising near the lows of the day so far during the mid-New York session in a flat position near 1.3835.
Cable has drifted lower towards daily support from a high of 1.3872 to a fresh daily low of 1.3827 as the US dollar moves higher for a third straight session.
The US dollar index DXY, which measures the greenback against a basket of currencies, was at its highest level in about three weeks as investors anticipate the Federal Reserve to soon start to taper its bond-buying program.
Following the latest Federal Reserve meeting, where Fed's Chairman, Jerome Powell, emphasised their focus on the jobs market, on Friday, the highly anticipated Nonfarm payrolls report showed jobs increased by 943,000 in July, above the 870,000 forecasts by economists in a Reuters poll.
Coupled with hawkish comments from several Fed officials, these recent events have reaffirmed a sense of urgency at the Fed for a tapering decision to be made imminently giving rise to higher long-end rates and a firmer greenback.
Nevertheless, sterling is showing signs of strength elsewhere as currency traders are increasingly focused on which central banks are moving forward with unwinding pandemic-era stimulus.
As traders single out the European Central bank as a laggard in this respect, EUR/GBP fell to an 18-month low on signs of an economic recovery and falling COVID-19 rates.
The optimism has raised prospects of an earlier interest rate lift-off in the UK compared to the eurozone.
There had been fears that the so-called ''Freedom Day'' would result in a rapid escalation of covid in the UK, but extraordinarily, COVID-19 cases have been falling in a dramatic drop.
The Bank of England (BoE) last week flagged how it might gradually rein in the stimulus and the prospect of the UK's MPC hiking rates well before they end quantitative easing is a bullish factor for the pound going forward.
Meanwhile, from a net GBP position perspective, last week net shorts dropped sharply in a follow-through from month end squaring, profit-taking and on the back of hawkish speeches from MPC members.
For the week ahead, US Consumer Prices will be the key event on Wednesday.
The market consensus stands at 5.3% YoY and this release could prove to be directional for the greenback.
However, ''another strong print is unlikely to sway core FOMC voters that the current phase of intense inflation pressures is anything other than transitory,'' analysts at ANZ Bank argued.
''Following the July FOMC meeting Chair Powell said the Fed wouldn’t hesitate to use its policy tools if inflation pressures prove to be more than just transitory. However, he thinks this is unlikely to happen until maximum employment is reached, and this goal remains some way off.''
GBP/USD technical analysis
The pound is on the verge of completing the reversion back to the neckline of the W-formation located in the 1.3780s:
1-hour chart
This would be expected to act as firm support in initial tests.
A break of which opens risks to a downside bear continuation on US dollar strength.
If the structure holds, then the upside and prior support will come back into focus near 1.3870 which may eventually give way to higher recovery highs.
