Sterling Elevated Despite Risk Off

GBP/USD ANALYSIS

  • Recent UK economic data supportive of GBP upside.
  • Geopolitical noise plaguing markets.

CABLE FUNDAMENTAL BACKDROP

GBP/USD is testing key levels after better than expected employment data and inflation earlier this week. This adds to the aggressive tightening outlook for the Bank of England (BoE), with markets roughly pricing in six interest rate hikes this year (see table below). Yesterday’s FOMC minutes was received by markets in a dovish light – although the minutes are slightly outdated and have seen new data since then (higher US inflation).

BOE INTEREST RATE PROBABILITIES

Source: Refinitiv

With geopolitics (Russia/Ukraine) favoring a slightly cautious approach to markets this morning, sterling has shrugged off risk aversion for now. Other safe-havens have been bid but markets are oscillating as news comes in. Should tensions de-escalate I think the pound will hold its own against the greenback as there is no reason (as of now) to revise the current hawkish outlook. This being said, the dollar is no different and its recent bearish move may be fading leaving GBP/USD in an interesting situation.

GBP/USD TECHNICAL ANALYSIS

GBP/USD DAILY CHART

gbp/usd daily chart

Chart prepared by Warren Venketas, IG

The daily GBP/USD chart shows price action putting pressure on channel resistance (black) which coincides with the 1.3600 psychological handle. This level has been quite resilient of recent and a close above could see prices move towards subsequent resistance targets.

From a bearish perspective, dollar fundamentals also favor USD strength which has not filtered through as of yet. This could be a pivotal moment where cable could pullback towards 1.3500 after a strong rally but with both central banks in the hawkish camp we are unlikely to see any significant moves up or down medium-term. Range: 1.34001.3700.

Key resistance levels:

  • 1.3644
  • Channel resistance

Key support levels:

IG CLIENT SENTIMENT SEES SHORT-TERM UPSIDE

IG Client Sentiment Data (IGCS) shows retail traders are currently marginally short on GBP/USD, with 52% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a bullish bias.

Contact and follow Warren on Twitter: @WVenketas