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GBP/USD Tumbles As DXY Bounces From 5-Month Lows

The GBP/USD pair hit its highest level since August 1, 2023, on Thursday. However, the price action reversed as the dollar strength index rebounded from its 5-month lows. As a result, the US dollar to British pound exchange rate lost 0.59% and was trading at 1.272 at press time.

On a monthly timeframe, the cable pair is still up 0.77% in its second consecutive green month. However, it is now trading within a strong supply zone, which caused today’s reversal. On the higher timeframe, the outlook remains bullish for the sterling.

A major reason behind the uptrend in GBPUSD is the hawkish stance of the Bank of England, compared to the dovish approach of the US Federal Reserve. While both central banks are fighting the sticky inflation, BOE has vowed to keep rates high longer than its US counterpart.

The weakness in the dollar is evident from the 2.16% drop in the DXY index in December. While the index might see a short-term bounce as it recently hit a support level, the downtrend is likely to persist to the high expectations of rate cuts in 2024.

The following chart shows that there is a strong supply above 1.275 level which caused the recent correction in the forex pair. Even though the high timeframe GBP/USD forecast is still looking bullish, in a short timeframe, there could be a pullback if the DXY bounce gains strength in the coming days.

Technical analysis of GBP/USD