Pound Sterling Pulls Back

On Tuesday, the pound sterling was confidently gaining in value. However, yesterday, it showed a rapid drop of the same magnitude amid the situation over energy resources. Firstly, Joe Biden once again said that he would try to persuade the European Union to ban Russian oil and gas.

Notably, Europe highly depends on Russian fuel, and it will hardly be able to replace it with supplies from other countries. The US may export only an insignificant amount of fuel, but that is not enough. In addition, energy prices in the US are only slightly lower than in the European Union, whereas, in Russia, fuel is five or six times cheaper.

Thus, if Europe follows the US steps, it is likely to face the energy deficit and extremely high fuel prices. It means that the European economy will be almost destroyed. Secondly, yesterday, Russia announced that it would seek payment in rubles for gas sales from "unfriendly" countries, including Western Europe.

Of course, this action shocked everyone. The fact is that in the post-war world, prices of commodities were denominated only in US dollars. In other words, there was a unified system of pricing and calculations. The system was convenient and allowed to bring prices to a certain standard, thus lowering them.

If prices are denominated in various currencies, the market may slide into chaos, and commodity prices will inevitably surge. However, the changes will affect only "unfriendly" countries. Other countries will be able to apply the system adopted long ago. It means that, for example, North Africa or the Middle East will be able to purchase gas to sell it to Europe, though at higher prices.

In any case, for Europe, energy prices will soar, thus hitting its economy. Thus, there is no wonder that European currencies are losing value. Moreover, the EU may even place an embargo on Russian fuel since it will still have to buy it through intermediaries. Nevertheless, it will cost a lot for the European Union. This has become the main reason for the British pound’s depreciation.

Technical Outlook

The pound/dollar pair touched the resistance level of 1.3300. After that, the volume of long positions dropped, thus causing a pullback and a partial recovery of the US dollar. On the four-hour chart, the RSI technical indicator jumped to the overbought area, thus proving a decline from the resistance level. In the same period, we see that the Alligator’s moving averages intersect. This fact points to a change in the trading sentiment from bullish to bearish.

After a pullback, the quote returned to 1.3175, the 23.6 Fibonacci level, and stagnated. If the price settles below this level, short positions will increase, thus accelerating the downward movement. The alternative scenario will become possible in the case of a stable hovering around 1.3175. This may limit the greenback’s recovery.

In terms of the complex indicator analysis, we see that technical indicators are signaling sell opportunities on the short-term and intraday periods amid the decline from the resistance level. In the mid-term period, technical indicators also provide short signals due to the downtrend.

GBP/USD 4-hour chart.