The pound sterling is showing increased volatility throughout the market amid an almost empty economic calendar and closed trading floors in the US and China. The sterling, paired with the dollar, reached 34-month highs, testing the resistance level of 1.3900 (the upper line of the Bollinger Bands indicator on the daily chart). And although the buyers were unable to impulsively conquer the 39th figure, they very clearly indicated the priority of the upward trend. On the one hand, this fact should not cause any surprise. The dollar index is showing a downward trend, while the pound is supported by many fundamental factors, which I will later in this article. On the other hand, GBP/USD traders decided to "play" these factors with a noticeable delay, surprising traders with unexpected agility against the background of the general phlegmatic nature of today's trading. Whatever it was, the fact remains that the sterling, paired with the greenback, has defined new price horizons for itself, aiming at the 40th figure. If the GBP/USD bulls gain a foothold above 1.3900, it will only be a matter of time before reaching the 1.4000 mark target.
The last time the pound was at such heights was in the spring of 2018 when the UK achieved an extension of its exit date from the European Union. This fact has tempered the anxiety of traders regarding the implementation of the "hard" Brexit scenario, after which the pound-dollar pair began to actively buy. The peak of the upward movement was marked at 1.4376, after which the price rolled down, on the "rails" of concern about the same Brexit. At that time, this became the main topic among GBP/USD traders, so any price rise was temporary. The behavior of the pound depended on the answer to one question: "deal or no deal?"
At the moment, the pair is affected by other fundamental factors. The market primarily assesses the pace at which the British economy is "moving away" from the coronavirus strike, which sent the country into a lockdown for the second time.
This issue is viewed through the prism of monetary policy prospects. At its last meeting, the Bank of England made it clear that the regulator will not introduce a negative rate in the foreseeable future, but at the same time, it will not abandon this scenario in principle. Everything will depend on the dynamics of key macroeconomic indicators. Therefore, each such release is now playing a critical role, given the prospects at stake.
Actually, for this reason, the pound received a "ticket upwards" after the recent publication of data on the growth of the British economy in the fourth quarter of 2020. Let me remind you that on a quarterly basis, the GDP volume remained above zero, twice exceeding the expectations of experts: (1% growth instead of the expected growth of 0.5% QoQ). On an annualized basis, the indicator also entered the "green zone" (-7.8% instead of the expected result -8.1%). If we talk about the December indicator, then there is also a positive trend relative to the failed November: the indicator increased to 1.2% (in November there was a decline to -2.5%), with the forecast of growth to 1%.
This report was published last Friday, but buyers of the GBP/USD pair were able to use it only today. The fact is that on the last day of the trading week, the US dollar strengthened throughout the market, demonstrating correctional growth. The correction was driven by traders' concerns about the prospects for US-China relations. The media reported that Washington will not only keep the existing tariffs inherited from Trump but will also increase the sanctions pressure on Beijing. The surge in anti-risk sentiment allowed the greenback to develop corrective gains.
But as the dollar bulls loosened their grip, the pound still showed itself, renewing its 34-month high. Moreover, in my opinion, the GBP/USD pair retains the potential for further growth - at least to the upper line of the BB indicator on the monthly chart (1.3950 marks). The main target of the upward movement is located at 1.4000 - this is the upper border of the Kumo cloud in the same timeframe.
The overall fundamental picture contributes to the revaluation of the pound. After all, traders were pleased not only by the key data on the growth of the British economy. Earlier, positive reports on inflation and labor market growth were published. Thus, the general consumer price index (in monthly terms) in January left the negative zone and reached 0.3%, while on an annualized basis, the indicator accelerated to 0.6% (from the previous value of 0.3%). Core inflation increased to 1.4%. The labor market is also holding back "coronavirus strikes" despite tough quarantine restrictions. Against the backdrop of the autumn-winter lockdown, the number of applications for unemployment benefits in December increased by only 7,000 against the estimated growth of almost 50,000. All these releases confirm the gradual recovery of the British economy.
Thus, the wait-and-see position of the Bank of England, the growth of key macroeconomic indicators, and the weak position of the US dollar allow the GBP/USD bulls to count on new price conquests. Also, the sterling reacted positively to reports from the front of the fight against coronavirus: the rate of spread of the coronavirus in the country is gradually slowing down, while the number of vaccinated, on the contrary, is growing. In response to such trends, the authorities have already started talking about easing quarantine restrictions that have been in effect since early November. This factor has also become an important building block in the formation of the upward trend.
In conclusion, it should be noted that after such a sharp and rapid growth, a downward pullback should be expected (especially if buyers do not gain a foothold above 1.3900). It is advisable to open longs precisely on such price downturns since the upward trend is still in force - both from the point of view of the foundation and from the point of view of technology. The pair, on all "older" timeframes (from H4 and higher), is either on the upper line of the Bollinger Bands indicator or between the middle and upper lines, which indicates the priority of the upward direction. On timeframes from H4 to W1 (that is, except for the monthly chart), the Ichimoku indicator formed a bullish Parade of Lines signal when the price is above all the indicator lines, including the Kumo cloud. This signal indicates a bullish sentiment. The first target of the upward movement is the resistance level 1.3950, the top line of the Bollinger Bands on the monthly chart. The main target - 1.4000 - is the upper border of the Kumo cloud in the same timeframe.
