The GBP/USD pair has been on a steady rise for the past few days, reaching its highest level since September 9 on Friday. The pair traded around 1.2630, up from a weekly low of 1.2446, as the US dollar remained under pressure and the UK data showed signs of economic resilience.
The US dollar has been losing ground against its major rivals, as the market expects the Federal Reserve to keep interest rates unchanged for a prolonged period. The Fed minutes from the November meeting, released on Wednesday, revealed that policymakers were concerned about the downside risks to the economy and inflation from the omicron variant of the coronavirus. The minutes also showed that the Fed was open to speeding up the tapering of its asset purchases, but did not discuss the timing of the first rate hike.
The market is now pricing in a 50% chance of a rate cut by the end of 2024, according to the CME FedWatch Tool. This contrasts with the Fed’s own projections, which indicate three rate hikes next year. The divergence between the Fed and the market has weighed on the US Treasury bond yields, which have fallen to their lowest levels since October. The yield on the benchmark 10-year bond was around 1.45% on Friday, down from 1.65% a week ago.
The weak US dollar has also been affected by the mixed US data, which showed a slowdown in the manufacturing and services sectors in November. The IHS Markit flash PMIs for both sectors came in below expectations, indicating a loss of momentum in the economic recovery. The data also showed that inflationary pressures remained elevated, as input costs and output prices rose at near-record rates.
UK pound benefits from hawkish BoE and upbeat data
The UK pound, on the other hand, has been supported by the hawkish stance of the Bank of England (BoE) and the upbeat UK data, which showed a strong performance of the economy in the third quarter. The BoE surprised the market by raising interest rates by 15 basis points to 0.25% on November 4, becoming the first major central bank to tighten monetary policy since the pandemic. The BoE also signaled that further rate hikes were likely, as inflation was expected to rise above 5% in the coming months.
The UK data, released on Thursday, confirmed that the economy grew by 1.3% in the third quarter, rebounding from a 1.6% contraction in the second quarter. The growth was driven by the consumer spending, which rose by 1.2%, and the business investment, which increased by 2.4%. The data also showed that the UK public sector net borrowing fell to £20.5 billion in October, down from £22.1 billion in September, as tax revenues improved.
The UK pound was also boosted by the positive developments on the Brexit front, as the UK and the EU agreed to resume talks on the Northern Ireland protocol next week. The protocol, which aims to avoid a hard border on the island of Ireland, has been a source of tension between the two sides, as the UK has threatened to invoke Article 16, which allows either party to suspend parts of the agreement if it causes serious economic, societal or environmental difficulties. The EU has warned that such a move would trigger a retaliation and jeopardize the trade deal.
Technical outlook for GBP/USD
The GBP/USD pair has been trading in an ascending channel since November 15, indicating a bullish trend. The pair has also broken above the 100-day and 200-day simple moving averages (SMAs), which act as dynamic support and resistance levels. The pair is currently facing a strong resistance at 1.2650, which coincides with the upper boundary of the channel and the 61.8% Fibonacci retracement of the decline from 1.2900 to 1.2270. A clear break above this level could open the door for further gains towards 1.2700 and 1.2750.
On the downside, the pair has a strong support at 1.2550, which coincides with the 50% Fibonacci retracement and the 200-day SMA. A break below this level could trigger a correction towards 1.2500 and 1.2450, which align with the 38.2% Fibonacci retracement and the lower boundary of the channel. The pair would need to break below 1.2400, which coincides with the 23.6% Fibonacci retracement and the 100-day SMA, to invalidate the bullish scenario and resume the downtrend.
