GBP/USD rallies off 37-year lows – merely an oversold bounce?

Cable has had a rough 4-week stretch, shedding over 800 pips from the mid-August high above 1.2200 to trade near 1.1400 earlier this week. In fact, on Wednesday, the pair briefly hit its lowest level since 1985!

Bulls did finally step in to defend that key support level near 1.1415, taking the pair back up to the mid-1.1600s during today’s European session. Meanwhile, the 14-day RSI indicator, a widely-followed overbought/oversold oscillator has turned higher to cross back above 30, suggesting that the pair could see a larger bounce from the recent deeply oversold levels.

That said, the economic outlook for the UK looks particularly bleak this winter between slowing growth, higher inflation, and a brutal energy crisis. Against that backdrop, GBP/USD’s bounce may stall out around previous-support-turned resistance at 1.1760, a level that also marks the 38.2% Fibonacci retracement of the August-September drop.

As bears are learning this week, no market moves in a straight line, but as we look out a couple of weeks and beyond, the path of least resistance for GBP/USD remains to the downside for now.