GBP/USD hits highest since December, but will the rally last?

The pound has hit its highest level against the US dollar since the end of last year. Although the dollar has strengthened against most currencies this year, the pound has thus far been more resilient thanks in part to a stronger UK economy and despite record low inflation. The latter has been lent additional buoyancy today by lending data which showed the number of mortgages approved for home purchases increased by 36,400 applications in January. It was up from a revised 35,800 applications the month before, beating expectations of 36,200. Nevertheless with the prospects of the Fed being the first major central bank to increase interest rates, the Cable may struggle to push further higher from these levels. Yesterday, the Fed Chairwoman Janet Yellen indicated that rate hikes would be considered on a meeting-by-meeting basis, while making it clear that there won’t be any in the next couple of meetings. Nevertheless, she has at least laid the groundwork for a gradual rate hiking cycle, possibly from around the middle of this year. If seen, the dollar may continue to push higher and even the pound may not be able to stand on the way.

The GBP/USD extended its gains this morning to trade for a time above 1.5535 before pulling back slightly. It has thus broken above the psychological 1.5500 handle and also the 23.6% Fibonacci retracement level around 1.5480. The key question now is whether the bulls can hold their ground above these levels on a closing basis. If they do, then that would mark another bullish development which could give rise to further follow-up technical buying. In this scenario, the bulls could easily target the previous resistance and the 100-day moving average round 1.5570/80. Thereafter an eventual rally towards the more-important 38.2% Fibonacci level at 1.5805 would also be a possibility. However, a failure to hold above 1.5500 could mark the resumption point of the long-term downward trend, or at least a pullback towards the next level of support around 1.5350 or 1.5315. In short, depending on what happens by the end of today’s session we could have a good clue in terms of what to expect for at least the remainder of the week.