GBP/USD Forecast: Bullish bias intact as long as 1.3675 support holds

GBP/USD has advanced to its highest level in more than two months.
The pair shows technical overbought conditions in the near term.
Additional gains are likely in case buyers defend 1.3675 support.

Eren Sengezer FXStreet

GBP/USD has preserved its bullish momentum following Wednesday's rally and touched its highest level since late October near 1.3750. The dollar's valuation continues to drive the pair's action but the technical developments suggest that the pair may need to make a downward correction before stretching higher.

The US Dollar Index, which tracks the greenback's performance against a basket of six major currencies, fell sharply on Wednesday and continued to edge lower early Thursday. On a weekly basis, the index is already down 1% and on track to post its largest one-week loss since May.

FOMC Chairman Jerome Powell's cautious remarks about reducing the balance sheet soon after the first rate hike hurt the dollar earlier in the week. Wednesday's inflation report, which revealed that the annual Consumer Price Index (CPI) climbed to 7% in December as expected, made it difficult for the currency to shake off the bearish pressure.

Although the CME Group's FedWatch Tool shows that markets are pricing a 74.4% probability of a rate hike in March, investors might be reassessing the odds of four rate increases in 2022 on hopes of inflation easing later in 2022.

In the second half of the day, the Producer Price Index data from the US will be watched closely by market participants. If the annual PPI arrives near the market consensus of 9.8% in December, the dollar could find it difficult to stage a rebound considering the market reaction to the CPI report. On the other hand, a stronger-than-forecast increase in producer prices could cap GBP/USD's upside.

GBP/USD Technical Analysis

GBP/USD is trading above the ascending regression channel coming from December, suggesting that the pair is technically overbought in the short term. Additionally, the Relative Strength Index (RSI) indicator on the daily chart is holding near 80, confirming the view that the pair might be poised for a technical correction.

On the downside, 1.3700 (psychological level) aligns as the first support before 1.3675 (mid-line of the ascending channel). As long as the latter holds, buyers could see that as a sign of the continuation of the uptrend.

Interim resistance seems to have formed at 1.3750 ahead of 1.3780 (static level) and 1.3800 (static level, psychological level).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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