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FX.co ★ GBP/USD: busy week ahead

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Analysis News:::2022-01-24T05:57:58

GBP/USD: busy week ahead

GBP/USD: busy week ahead

The British pound had a chance to recoup its losses last week but bulls failed to push it higher no matter how hard they tried. Markets are waiting for the Fed's meeting this week which is expected to show an even more aggressive stance of the regulator. Against this background, buyers of the pound will not have a single chance for growth. In addition, due to the recent macroeconomic data, traders began to doubt that the Bank of England would raise the rate in February.

UK retail sales for December dropped by 3.7% month-on-month and by 0.9% year-on-year. Markets expected to see a monthly decline of only 0.6%, while the annual reading was expected to rise by 3.4%.

The index of consumer confidence sank to -19, while analysts expected a decline to -15.

Of course, coronavirus restrictive measures have played a role here. Experts have two different views on the situation. Some of them believe that even after the lockdowns are lifted, retail sales are unlikely to return to pre-pandemic levels. The number of buyers will remain low as mixed work conditions have become the new norm and household budgets shrink.

Others are confident that the situation will improve. Omicron's influence on the economy was only temporary. Experts hope that a new, less aggressive strain will end the pandemic and major lockdowns. Therefore, markets are likely to downplay this negative data and will wait for a new portion of more encouraging statistics.

Moreover, the Bank of England will not solely rely on recent statistics when deciding on its policy tightening in February. However, this downbeat data may put the plan to raise the rates four times this year into question. Given that this scenario has already been priced in, the pound may come under pressure after the forecast revision. If the number of rate hikes turns out to be less than expected, the sterling is at risk of a collapse.

The current weakness of the pound looks quite natural though as the British currency has added 4.3% over the month and is tired of the rally. So, the downward correction was about to start at any moment. In addition, the GBP/USD pair faced strong resistance at around 1.3700. The 200-day moving average has been serving as a resistance level since September, thus indicating the prevailing bearish sentiment.

The chances that the corrective pullback in the pound will continue this week are high. Markets are still evaluating the Fed's hawkish sentiment. The Bank of England's policy does not look so aggressive compared to the policy of its American counterpart. Judging by the rhetoric of the US regulator, none of the world's central banks will keep up with the Fed's rate hike. At present, the Federal Reserve has the most hawkish view on monetary policy, so the US dollar has all the advantages here.

Current support is found at 1.3530 and 1.3500 (psychological level), while resistance is located at 1.3600 (psychological level) and 1.3650.

GBP/USD: busy week ahead

The short-term outlook for the pound is pessimistic. However, in the long term, analysts still expect the GBP/USD pair to grow.

For example, Scotiabank forecasts a recovery to 1.3800 as more rate hikes come into play. It is unlikely that the regulator will review its plans to raise the rate in February based only on one publication, the bank commented.

Meanwhile, US officials continue to actively promote the topic of raising rates in connection with the fight against inflation. In an interview with CNBC, Treasury Secretary Jeannette Yellen made it clear that the authorities are extremely worried about rising consumer prices. "Our responsibility is to work with the Fed on this issue. And we will do it," Yellen said.

If the government manages to take the pandemic under control, inflation should ease through 2022. Responsibility for fighting inflation lies jointly with the Fed and the Joe Biden administration, Yellen noted and expressed confidence in the Fed's ability to adequately assess the state of the economy.

Meanwhile, the US dollar index is under pressure as bulls are lacking confidence. On Friday afternoon, the bullish trend reversed from the level of 95.80.

In general, markets retain a positive outlook for the greenback. The first goal for USD is to overcome and consolidate above the level of 95.83. Further, USDX will move to this year's high of 96.46.

GBP/USD: busy week ahead

Analyst InstaForex
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