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A much stronger than expected UK GDP growth rate in November and a promising rebound in manufacturing activity in the same month has not been enough to propel GBP/USD above its 200-day moving average at 1.3737. Indeed, having failed to break above the key level, the pair has since fallen back into the 1.3710s, though is still trading with very modest on-the-day gains of about 0.1%. Perhaps it is the fact that the UK GDP growth is expected to go into reverse in December and January amid the disruptive impact of the rapid spread of Omicron that has prevented sterling from benefitting from Friday’s strong data. Perhaps it is the fact that, with the pair trading higher by about 1.0% on the week and on course for a fourth consecutive week of gains, during which time it has rallied more than 4.0% from under 1.3200, GBP/USD looks overbought that is holding it back from further gains.
Indeed, the pair’s 14-day Relative Strength Index has been above the 70.00 level that signifies overbought conditions now for the past three sessions. This may be encouraging sterling bulls to book profit rather than chasing GBP/USD higher, even if markets are reasonably confident that, amid optimism, the impact from Omicron will be shortlived and following recent strong jobs, hot inflation and better than expected GDP data, the BoE will hike rates again in February. Whilst expectations for further BoE tightening in the coming weeks may not be enough to push cable to even loftier than current levels, it may be enough to keep the pair supported upon any retracement back to say the 1.3600 level.
Of course, much will depend on the trajectory of the dollar. Analysts are undecided about the causes of the recent sharp deterioration in USD sentiment that has sent the DXY to two-month lows under 95.00. Some have argued that, with the hawkishness of the Fed now very much priced in, focus has turned to whether this will ultimately be a policy mistake that slows down the economy, thus halting the Fed’s plans to continue tightening in 2023 and beyond. The fact that money markets are pricing a terminal rate that is well below the Fed’s guided 2.5% suggests markets are not as bullish on the US economy’s long-term prospects as the Fed and traders are saying that this has been weighing on the dollar.
Others have argued that recent weakness is purely positioning based, noting that, for example, speculator positioning in recent weeks has been as heavily long USDs at any point over the last two years. Once the “weak hands” are flushed out, the longer-term dollar bulls may be able to regain control and send the DXY higher over the course of 2022. But first things first, traders have a spate of US data to get through on Friday including the December Retail Sales report, the December Industrial Production report and the January preliminary University of Michigan Consumer Sentiment survey, as well as remarks from influential Fed’s John Williams.