GBP/USD set to end week at 1.3600 level, nearly 100 pips up from intra-day lows

GBP/USD looks set to end Friday trade with gains of about 0.3%, making it amongst the best performing G10 currencies on the session, after not as bad as feared Q4 GDP and December activity data released during early European trade. The pair’s upside seems to have run out of steam at the 1.3600 level as FX flows die down ahead of the weekend, but GBP/USD nonetheless trades nearly 100 pips higher versus earlier session lows just above 1.3500.

Data out next week will play an important role in determining BoE tightening expectations for 2022 (currently, roughly a further 150bps of tightening is expected). The latest labour market data will be released on Tuesday and market participants will get a first look at how the UK labour market performed during the rapid spread of Omicron. January CPI data will then be released on Wednesday ahead of January Retail Sales figures on Friday.

Much weaker than anticipated US University of Michigan Consumer Sentiment survey data, which showed sentiment deteriorating to its worst levels since 2011, did not impact the pair much given that it isn’t seen as likely to deter Fed tightening. GBP/USD is thus on course to end the week around 0.5% higher, marking a second successive week of gains, during which time it has rallied about 1.8% from January lows.

It's unlikely that stronger than expected data next week could bolster BoE tightening expectations to be any more hawkish than they already are. Indeed, many analysts suspect the BoE will deliver far less tightening in 2022 than currently priced into money markets with the economy set to hit multiple speed bumps from Q2 onwards. These include tax hikes, energy price hikes and the prospect of higher borrowing costs and might dissuade the BoE from tightening so aggressively in H2 as inflation levels pull back from the more than 7.0% levels expected in April.

Meanwhile, the US calendar is dominated by Fed speak and the minutes of the last meeting, as well as January Retail Sales and Producer Price Inflation. GBP/USD may remain choppy as investors weigh up the outlook for BoE/Fed policy divergence and how the latest data/central bank releases (and commentary) influence this outlook. Technicians will note support in the 1.3500 area and resistance between 1.3600-1.3650.