Early in the American session, the British pound is trading around 1.2830 below the 21 SMA and above the 200 EMA. Technically, we can see that the British pound is oversold according to the 4-hour chart. A rally is in the cards if GBP/USD breaks above 1.2850.
Since it reached 1.3170, GBP/USD began a strong decline and is now in the oversold zone. In the next few days, there could be a recovery of the pair and the price could reach 6/8 Murray located at 1.2939. Eventually, the instrument could reach the psychological level of 1.30.
In the medium term, the British pound is expected to continue its fall as the economic outlook has weakened due to the interest rate hike by the Bank of England.
On the other hand, we see a recovery of the dollar index (USDX) as investors are already pricing in a 0.25% interest rate increase by the Federal Reserve on July 26. Hence, the official funds rate is expected to peak at 5.5%.
If the policy decision is positive for the US dollar, we could expect a strong fall in GBP/USD below 1.2790, so the price could reach 1.2695 or 4/8 of Murray.
The key for tomorrow will be to wait for the speech by the Federal Reserve Chairman who could shed light on the US dollar's outlook in the medium term. In case he signals more rate hikes, the US dollar could strengthen and put pressure on the British pound until it reaches 1.25.
Our trading plan for the next few hours is to buy GBP/USD at current price levels or in case there is a break above the downtrend channel and above 1.2850 (21 SMA), with targets at 1.2939 and 1.30.
The Eagle indicator is in the extremely oversold zone. Thus, an imminent technical bounce will happen in the next few hours. This can be seen as an opportunity to buy.