• GBP/USD bulls remained on a roll for the fifth week in a row.
  • Encouraging UK data, dovish Federal Reserve bets supported Cable.
  • The 1.2450 level remains a tough nut to crack ahead of the key United States data.

GBP/USD recorded solid gains in the second straight week of 2023, in the face of the continued United States Dollar (USD) downtrend and encouraging United Kingdom fundamentals. The Pound Sterling bulls, however, stalled just ahead of the 1.2450 barrier, as the focus shifts to the US growth figures in the week ahead.

GBP/USD hit five-week highs

The Pound Sterling extended its hold in the previous week, as the United States Dollar (USD) remained vulnerable near multi-month troughs amid increased bets that the US Federal Reserve (Fed) will stick with smaller rate hikes in the first quarter of this year, with a pause in its tightening cycle expected thereafter. A slew of downbeat United States economic data, viz, Retail Sales, Producer Price Index (PPI) and Industrial Production data only added to the dovish Federal Reserve rate hike expectations, offering little respite to USD bulls.

US recession fears came back to the fore midweek and fuelled a temporary recovery in the US Dollar only to be reversed by the end of the week, as mixed messages from the Federal Reserve policymakers combined with the persistent weakness in the US Treasury bond yields acted as a headwind. All in all, the Federal Reserve officials continued to root for smaller rate hikes, as markets priced in 25 basis points (bps) rates hikes in February and March. The sell-off in the US Treasury bond yields was aggravated by the Bank of Japan’s (BoJ) status quo on its yield policy, which wreaked havoc in global yields. The benchmark 10-year US Treasury bond yields finally sustained a break below the 3.50% key level.

On the other side, strong UK Jobs data, with a solid pay growth rise fanned expectations of further rate hikes by the Bank of England (BoE), despite easing inflationary pressures. The Unemployment Rate in the UK arrived at 3.7% in November. The UK Claimant Count Change came in at 19.7K in December while the wages excluding bonuses rose by 6.4% YoY in November vs. 6.3% expected. Meanwhile, the UK annualized Consumer Prices Index (CPI) came in at 10.5% in December against the 10.7% booked in November while missing estimates of a 10.6% print, the UK Office for National Statistics (ONS) reported on Wednesday. Markets remained hopeful for a 50 bps rate hike from the Bank of England at the start of the next month.

Testifying before the UK Parliament’s Treasury Select Committee last Monday, Bank of England Governor Andrew Bailey said, “the most likely outcome is that inflation will fall quite rapidly this year, probably starting in the late spring,” adding that “I am not endorsing a 4.5% bank rate peak” while talking on policy rates.

Meanwhile, Friday’s downbeat UK Retail Sales data provided Pound Sterling bulls a reason to briefly pause. The UK Retail Sales decreased 1.0% MoM and 5.8% Yoy in December, falling short of market expectations. 

A busy week ahead

Amidst China’s Lunar Year-induced week-long holiday and the Federal Reserve’s ‘blackout period’, the United Kingdom S&P Global Preliminary business PMIs and the Advance Q4 Gross Domestic Product data from the United States are likely to stand out.

These data are due for release on Tuesday and Thursday respectively. In the meantime, the broader market sentiment, US corporate earnings results and the Federal Reserve rate hike expectations will continue to impact the US Dollar valuations, eventually influencing the GBP/USD pair.

The US Gross Domestic Product and the earning reports could reinforce recession fears, which could rescue the safe-haven US Dollar at the expense of the higher-yielding Pound Sterling. Although China’s reopening optimism and positioning ahead of the Federal Reserve and Bank of England policy announcements positioning could keep Cable largely supported. 

GBP/USD: Technical outlook

GBPUSD

GBP/USD: Daily chart

Having paused its upbeat momentum once again below 1.2450, GBP/USD could pull back toward 1.2295, the 23.6% Fibonacci Retracement (Fibo) level of the latest uptrend from two-month lows of 1.1841.

Should the corrective downside gather steam, Pound Sterling sellers could challenge the 38.2% Fibo level of the same ascent at 1.2207. Further down, 1.2140 will be the level to beat for bears, which is the confluence of the bullish 21-Daily Moving Average (DMA) and the 50.0% Fibo level.

With the 14-day Relative Strength Index (RSI) still holding comfortably above the midline, the bullish potential remains intact in the week ahead.

Pound Sterling bulls need to find a strong foothold above the aforementioned powerful resistance at 1.2450 to unleash the additional upside toward June 2022 high at 1.2616.

Ahead of that, the 1.2500 round figure could provide an additional hurdle on Cable’s northward trajectory. 

GBP/USD sentiment poll

The FXStreet Forecast Poll  for the GBP/USD pair shows that bearish are still a majority, even in the near term. On average, the pair is expected to hover around 1.2300 next week, as 50% of the polled experts are looking for lower-than-current levels. In the longer run, the spread of potential targets have continued to widen. Some firmly bearish banks oppose to analysts looking for bullish breakouts.

 The Overview chart skews the scale to the upside, as moving averages are bullish in the three time frames under study, with the upper end of the range extending this week to 1.26 in the monthly view and beyond 1.27 in the quarterly perspective. 

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