British Pound Latest: GBP/USD Rally Continues, US Dollar Risks Lie Ahead

[MongiIG]

GBP/USD Price, Chart, and Analysis

• Cable nears a fresh two-month high.
• US Jobs Report the standout dollar risk.

Cable’s recovery from its multi-month lows printed in December continues with the pair pushing ever higher and back to levels last seen over two months ago. The 15 basis point interest rate hike in late December and the government’s slightly more lenient attitude towards omicron lockdown measures have given Sterling room to flex its muscles. With another UK interest rate hike likely at the next BoE meeting in early February, and with PM Boris Johnson keen to keep the UK economy open for as long as possible, the short-to-medium term outlook for Sterling remains positive.

In the short term, however, GBP/USD will be driven by US events and data. Later today the latest FOMC minutes will be released, while tomorrow the ISM non-manufacturing PMI release takes on more importance after yesterday’s manufacturing data showed prices paid dropping sharply in December. On Friday the latest, monthly look at the US jobs market with Non-Farm Payrolls expected to nearly double the lowly November figure.

Keep up to date with all market-moving data releases and events by using the DailyFX Calendar

Cable’s recent rally has seen it break a longer-term series of lower highs, and unless the pair fall back below 1.3162, the series of lower lows as well. The pair are now running into a cluster of old lows between 1.3570 and 1.3610 which may temper any move higher in the short term. All eyes on US data to help push the next move in cable.

GBP/USD DAILY PRICE CHART – JANUARY 5, 2022

Retail trader data show 52.11% of traders are net-long with the ratio of traders long to short at 1.09 to 1. The number of traders net-long is 2.84% lower than yesterday and 14.58% lower from last week, while the number of traders net-short is 11.12% higher than yesterday and 15.30% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse higher despite the fact traders remain net-long.

What is your view on GBP/USD – bullish or bearish?

 

Jan 5, 2022  |  Nick Cawley, Strategist. DailyFX

[RCtrader]

My view on GBPUSD is rather mixed. It reached a key horizontal resistance and was rejected by it with the release of the FOMC minutes. I expect it to make a few more bullish candles. It could even break the channel's upper bound. 

GBPUSD (1D) Chart

[MongiIG]

16 hours ago, RCtrader said:

My view on GBPUSD is rather mixed. It reached a key horizontal resistance and was rejected by it with the release of the FOMC minutes. I expect it to make a few more bullish candles. It could even break the channel's upper bound. 

GBPUSD (1D) Chart

Hi @RCtrader

Thanks for sharing your technical analysis on GBPUSD, great analysis!

GBP/USD TECHNICAL ANALYSIS

The peak in June last year of 1.4251 was the highest for GBP/USD since early 2018.

Since then, it has been caught in a descending trend channel. It is not far from breaking the upper side of the channel. It currently dissects at 1.3625 and might offer resistance.

Resistance could also be at the previous highs of 1.3599, 1.3835, 1.3913, 1,3982 and 1.4251.

GBP/USD has moved above its’ short and medium term simple moving averages (SMA) but it is struggling to clear the 100-day SMA for the moment. A decisive break above it may see further bullish momentum unfold.

On the downside, support might be at the previous lows of 1.3431, 1.3174 and 1.3161.

Chart created in TradingView

Written by Daniel McCarthy, Strategist for DailyFX.com. 6th Jan 2022.

[RCtrader]

What about fundamentals? Is a strengthening of the pound possible against the dollar? Both BoE and FED increased interest rates. FED is tapering QE. Does it mean gbpusd will start ranging? Which economy is stronger at the moment? 

[MongiIG]

12 hours ago, RCtrader said:

What about fundamentals? Is a strengthening of the pound possible against the dollar? Both BoE and FED increased interest rates. FED is tapering QE. Does it mean gbpusd will start ranging? Which economy is stronger at the moment? 

Hi @RCtrader

GBP/USD: BULLISH BACKDROP REMAINS

While we wait for the Federal Reserve to start opening the door to rate hikes, the Bank of England is already there and this was a saga that played-out throughout Q4 of last year.

The bank was expected to hike in November. When they didn’t the pair put in an aggressive move of weakness while jumping down to a major area of support. The bull flag that had been building for the entire second-half of the year was on the verge of being invalidated: The 38.2% Fibonacci retracement of the 2020-2021 trend was holding prices by a thread.

And then the BoE hiked in December and buyers got back on the bid. At this point, prices have almost traveled the entirety of the channel and are nearing the resistance side of that formation. I had highlighted this backdrop on Tuesday of this week and since then prices have continued to hold near short-term resistance.

Tomorrow should provide a key test here and the ideal scenario (at least to me) seems to be looking for USD-strength to allow for a pullback, at which point support potential may show around prior resistance of 1.3354, which could then allow for bullish continuation strategies into next week and thereafter.

GBP/USD WEEKLY PRICE CHART

Chart prepared by James Stanley; GBPUSD on Tradingview. DailyFX

[MongiIG]

12 hours ago, RCtrader said:

Which economy is stronger at the moment? 

Hi @RCtrader

A very hawkish set of FOMC minutes on Wednesday is still reverberating across markets, driving bond yields higher, hitting growth stocks and keeping the dollar reasonably well-supported. With the minutes revealing that the Fed already feels that conditions have been met for a first hike, today's December jobs data should keep the dollar bid on dips.

USD: Fed would welcome a stronger dollar

Going into today's US December jobs release, FX markets remain reasonably calm. Broader trade-weighted measures of the dollar remain within 1% of their late November highs and local stories, such as aggressive hiking in Eastern Europe, continue to play out in local currency markets - the Hungarian forint being the strongest performer over the last week.

But the Fed now stands centre stage after the release of those minutes. Please see James Knightley's and Padhraic Garvey's thoughts on the minutes here. Not only is the focus shifting to how quickly the Fed can hike rates - the Fed's out-rider James Bullard suggested the Fed could start in March - but also how quickly the Fed will start to shrink its balance sheet. It seems clear that the start of balance sheet reduction - or quantitative tightening - will start much quicker than the two-year gap from the first hike - seen in the last cycle. This is pressuring the entire US yield curve higher and weighing on the more interest-rate sensitive growth stocks. For example, the Russell 1000 Growth index is now 6% off its highs - the Russell 1000 Value Index is barely off 1%.

This makes a tricky environment for FX - one in which investors might favour the high yield/commodity FX space on the back of growth/tightening stories - but one that could be easily undone were equities to start correcting too quickly. Given that the Fed seems to have fully swung behind the hawkish narrative, we would expect the dollar to stay strong today and be bid on dips even if the nonfarm payrolls disappoint. The consensus seems to be for a 450k headline jobs number, a 4.1% unemployment rate, and 0.4% month-on-month average hourly earnings. Right now, with the Fed's rotation to inflation, it feels like the unemployment rate and average earnings will be more important. Any strong readings there could see the dollar pop higher.

DXY is in the middle of its six-week trading range, but today could be a catalyst for a push back to the highs near 97.00. 

 

GBP: Holding gains

On a trade-weighted basis, GBP is now trading at the highest levels since that fateful summer of 2016. The strength of sterling seems to correlate with moves in the sterling rates and yield markets, where UK gilt yields have seen by far the largest adjustment in the G10 space over recent weeks.

A lot is priced in for the Bank of England now. A 25bp hike is 80% priced for the 3 February meeting and the Bank Rate is priced at 1.00% for the August meeting. Our rates traders think that may be sufficient pricing for the time being. But that pricing looks unlikely to be unwound before the 3 February meeting and the BoE might feel emboldened by the hawkish shift from the Fed. 

Our 2022 FX view has been that the BoE story keeps GBP/USD better supported than EUR/USD in a strong dollar environment - and that EUR/GBP trades lower. We continue to hold that view and any dollar strength on the jobs data today could push EUR/GBP closer to the 0.8280/8300 area. Locally today we have the BoE's Catherine Mann speaking twice. She is on the dovish end of the spectrum but looks unlikely to shift BoE market pricing.

 

7th Jan 2022, ING Authors:

Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE

Francesco Pesole, FX Strategist