GBP/USD unable to breach 200DMA and 1.3750 mark just yet, though remains well support amid ongoing buck weakness

• GBP/USD has backed off of earlier highs having failed to break above 1.3750 or its 200DMA just below.
• Cable remains well support on the day however amid continued buck weakness and is now 1.0% up on the week.

GBP/USD’s bullish momentum has cooled off slightly in recent trade, with the pair unable to break above 1.3750 or hold to the north of its 200-day moving average at 1.3736. GBP/USD is now consolidating in the 1.3730s. Nonetheless, cable’s 0.2% rally from around the 1.3700 level on Thursday has taken its weekly gains to more than 1.0% and seen the pair reach its highest levels since late-October. The move higher reflects a continuation of the recent broad weakening of the dollar against its G10 peers that has seen the Dollar Index (DXY) drop more than 1.2% over the course of the last three sessions and to its lowest levels in more than two months underneath 95.00.

Traders and analysts have put the recent weakness down to a squeeze on the market’s (up until very recently) very crowded long-dollar positioning. Notably, recent weakness has seemingly gone against the fundamentals. Recent rhetoric from Fed members and last week’s minutes have markets betting on as many as four rate hikes from the bank this year, with recent inflation and employment data supporting the outlook for tightening. As a result, once the “weak hands” are flushed out and positioning has reverted somewhat back to normality, some are calling for the DXY to find support in the mid-94.00s and then rebound later in the year to reflect the hawkish Fed/strong US economy combination.

That suggests any further GBP/USD rally may struggle to extend beyond 1.3800. Technical indicators are also blinking that GBP/USD may be “overbought”, with the 14-day Relative Strength Index recently surpassing the 70.00 seen as indicating conditions have become overbought. But if the dollar does regain its pose in the coming weeks/months, sterling might well be one of the G10 currencies able to hold its ground given expectations for the BoE to continue hiking interest rates and to start reducing the size of its balance sheet this year, keeping it one step ahead of the Fed when it comes to policy normalisation. For now, analysts think GBP will remain immune to calls for the UK PM’s resignation over his attendance to a work party during lockdowns. “With the UK ahead of other major developed economies in regard to the Omicron wave and the roll-out of booster jabs, GBP will likely see limited impact from the uncertainty over PM Johnson’s future”, wrote analysts at MUFG.

In the short-term, GBP/USD traders will be focused on Fed Vice Chair nominee Lael Brainard’s remarks in a Senate Hearing from 1500GMT as well as on other Fed speakers to guage the levels of support for multiple rate hikes and quantitative tightening in 2022. US weekly jobless claims figures will also be released at 1330GMT ahead of Friday’s US December Retail Sales report at the same time. UK November monthly GDP figures will also be released on Friday prior to the European open at 0700GMT.