The GBP/USD exchange rate continued to build higher through the European session and notched up a four-day win streak. Secondly, the GBP/USD pair climbed, touching highs above 1.3385 indicative of the much improved mood amongst investors and markets. Specifically, investors are getting ready for some of the largest economic releases of the month and the next BoE interest rate decision.
Commenting on the move in GBP/USD, analysts noted that the activity in GBP/USD reflects a broader story across the currency market. Now as we head into critical US employment data, the US Dollar is under pressure. Market expectations surrounding the Federal Reserve’s monetary policy have intensified, adding further layers of complexity to the currency’s performance.
Technical Analysis of GBP/USD
The recent uptick in GBP/USD can be explained by a host of technical reasons. The pair has plummeted from a high just a month ago of 1.3783 to a recent bottom at 1.3008. It has recently crossed above the 38.2% retracement level at 1.3304, bolstering its recovery momentum. The 20-day Exponential Moving Average (EMA) of 1.3286 is above current price, so this indicates that the bulls are in control. This development is reflective of an overall positive near-term bias.
Traders are watching this short-term moving average closely, because a fall under it would provide an early indicator of a major drop’s change in momentum. Any drop under 1.3286 points to clear downside dangers. Look for support levels to be tested including the December low at 1.3180. On the flip side, near-term resistance for GBP/USD comes in at the 50% retracement of 1.3395. An upside clearance above this hindrance may see gains stretched closer to the 1.3488 61.8% Fibonacci retracement level.
The 14-day Relative Strength Index (RSI) is a pleasant 61. This level is important as it demonstrates positive bullish momentum and suggests that the GBP/USD market is not overbought, strengthening the bullish outlook.
Economic Factors Influencing GBP/USD
GBP/USD continues to rally. Investors are continuing to remain on edge as the next round of significant economic data releases could inject rapid movement back into the market. Coming from the US, the October and November US Nonfarm Payrolls (NFP) will steal the show. These figures in many ways are key bellwethers of not just US job growth, but the entire US economy.
Market participants are understandably concerned about the implications of these employment numbers. They think these figures might really move the needle on expectations for the Federal Reserve’s monetary policy course. As such, any indication of a softening job market would likely lead to reassessment of Fed policy, throwing major weight on the side of currency valuations.
“Inflation is too high and the job market is getting softer, but we cannot let the labor market falter.” – Mary Daly
This statement from Mary Daly emphasizes the delicate balance that policymakers face as they navigate economic pressures while attempting to maintain labor market stability.
Upcoming Data and Its Implications
In the bond markets, investors are looking anxiously toward Tuesday’s data releases. These will be capped off by the UK labor market figures for the three months ending in October and the preliminary S&P Global Purchasing Managers’ Index (PMI) for December. These releases are always useful in gauging economic performance across the entire UK and can cause major moves in GBP/USD.
US Retail Sales data for October and flash S&P Global PMI data for December will be released, adding another layer of scrutiny for market participants. The dynamic between UK and US data will be key though as traders look to price in possible scenarios for GBP/USD.
Analysts are bullish on GBP/USD. They caution that volatility could be triggered once market expectations build for the Bank of England to reduce interest rates by 25 basis points to 3.75%. The move would be tremendously impactful on currency valuations and will be a major topic of interest for currency traders.