The British Pound (GBP) gained some positive traction against the US Dollar (USD) on Monday, but remained below the mid-1.2700s level as the market lacked follow-through buying interest. The GBP/USD pair traded around 1.2725 at the time of writing, up 0.15% for the day.
BoE rate hike expectations support GBP
One of the main factors supporting the GBP was the rising expectation of further interest rate hikes by the Bank of England (BoE) in the near future. The market is currently pricing in a more than 80% chance of a 25 basis points increase at the next BoE meeting in September, following the strong UK wage growth and inflation data in the second quarter.
The UK’s National Statistics reported that the annual British CPI inflation rose to 6.8% in July, above the BoE’s target of 6%. The core CPI, which excludes volatile oil and food prices, also increased by 6.9%, beating the market consensus of 6.8%. Moreover, the UK GDP grew by 4.8% in the second quarter, rebounding from a 1.6% contraction in the first quarter.
These figures suggest that the UK economy is recovering from the impact of the coronavirus pandemic and Brexit, and that the BoE may need to tighten its monetary policy sooner than expected to keep inflation under control.
USD remains subdued amid Fed uncertainty
Another factor that helped the GBP/USD pair was the subdued performance of the USD, which failed to capitalize on its safe-haven appeal amid rising geopolitical tensions and coronavirus cases. The USD index, which measures the greenback’s strength against a basket of six major currencies, was flat at 92.60 on Monday.
The USD was weighed down by the uncertainty surrounding the Federal Reserve’s tapering plans, as investors awaited more clues from the upcoming Jackson Hole symposium later this week. The Fed Chair Jerome Powell is expected to deliver a speech on Friday, which could provide some hints on when and how the Fed will start reducing its massive bond-buying program.
The market is divided on whether the Fed will announce its tapering timeline at the Jackson Hole event or wait until its next policy meeting in September. Some analysts believe that the Fed may delay its tapering decision until it sees more evidence of a sustained economic recovery and labor market improvement, especially after the disappointing US retail sales and consumer sentiment data last week.
GBP/USD outlook remains bullish above 1.2700
From a technical perspective, the GBP/USD pair remains in a bullish trend above the 1.2700 psychological level, which coincides with a rising trendline support that has been holding since late July. The pair also trades above its 50-day and 100-day moving averages, indicating a positive momentum.
The immediate resistance for the pair is seen at 1.2760, which is the high of August 18 and also a horizontal resistance level. A break above this level could open the door for further gains towards 1.2800 and 1.2840, which are previous swing highs from July and June respectively.
On the flip side, if the pair fails to sustain its gains and falls below 1.2700, it could face some selling pressure towards 1.2660 and 1.2620, which are previous lows from August and July respectively. A break below these levels could signal a bearish reversal and expose 1.2580 and 1.2500 as potential downside targets.