GBP/USD clings to gains above mid-1.2200s amid broad-based USD weakness

• GBP/USD edges higher for the third successive day amid the prevalent USD selling bias.
• Bets for less aggressive Fed rate hikes, depressed US bond yields undermine the buck.
• Traders now look to next week’s inflation data/central bank meetings for a fresh impetus.

The GBP/USD pair gains traction for the third successive day on Friday and sticks to the positive bias through the mid-European session. The pair is currently placed comfortably above the mid-1.2200s and remains well within the striking distance of its highest level since June 17 touched earlier this week. 

A combination of factors keeps the US Dollar bulls on the defensive, which, in turn, is seen lending some support to the GBP/USD pair. The optimism over the easing of strict COVID-19 restrictions in China remains supportive of a generally positive tone around the equity markets. Furthermore, the uncertainty over the Fed’s rate-hike path is seen weighing on the safe-haven Greenback.

The incoming positive US economic data has been fueling speculations that the Fed might lift interest rates more than estimated. That said, the recent comments by several FOMC members, including US Federal Reserve Chairman Jerome Powell, suggested that the US central bank will slow the pace of its policy tightening. In fact, the markets are pricing in a relatively smaller 50 bps lift-off by the Fed in December.

This leads to a further decline in the US Treasury bond yields and continues to weigh on the Greenback. Hence, the market focus will remain glued to the upcoming FOMC meeting on December 13-14. The Bank of England is also scheduled to announce its policy decision next week. Apart from this, investors will confront the release of the latest consumer inflation figures from the US and the UK.

The combination of key central bank event risks and macro data should help determine the next leg of a directional move for the GBP/USD pair. In the meantime, traders on Friday will take cues from the US economic docket, featuring the release of the Producer Price Index (PP) and the Prelim Michigan Consumer Sentiment Index. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide some impetus to the major.  

From a technical point-of-view the breakout of the GBP/USD's multi-month descending channel and then above the 1.1740 last lower high of the prior downtrend, have solidified a reversal. The rising sequence of peaks and troughs over the last few months have established a new uptrend. Recently the pair also broke and closed above the 200-day Simple Moving Average (SMA) another key determinant of an uptrending bias. Notwishstanding shaky fundamentals, the overall advantage, therefore, remains with the Pound Sterling bulls, and the bias for a continuation higher.  It would require a break below the 1.1900 lows to introduce doubt into the bullish thesis and suggest a possible reversal of the trend and beginning of a possible extended move lower. 

Technical levels to watch