- A combination of supportive factors pushed GBP/USD to a two-month high on Wednesday.
- Allaying Omicron’s fears, the BoE rate hike bet continued to act as a tailwind for the British pound.
- Powell’s less sharp comments weighed on the USD and continued to support the upward move.
- The bulls may now take a brief break as the market’s focus remains on the US inflation data.
The British pound continued with its relative outperformance on hopes that the Omicron outbreak would not derail the UK economy. Furthermore, rising bets for additional rate hikes by the Bank of England continued to act as a tailwind for sterling. This, combined with the prevailing US dollar selling bias, pushed the GBP/USD pair during the Asian session on Wednesday to the highest level since the beginning of November.
The greenback weakened across the board in response to less scathing comments from Fed Chair Jerome Powell during his nomination hearing before the Senate on Tuesday. Powell said a decision on whether to shrink the central bank’s balance sheet could take several months and allay fears about a sudden withdrawal of monetary support. This was evident from a further fall in US Treasury bond yields.
This, coupled with a decent rebound in the equity markets, dampened the safe-haven greenback and gave additional boost to the major. That said, the prospects of an eventual Fed lift-off could help limit any further USD losses. The Bulls may also refrain from making fresh bets and may prefer to wait before releasing US consumer inflation data later in the opening day of the North American session on Wednesday.
The headline US CPI is projected to increase to 7% from 6.8% in December, while the core CPI has increased from 4.9% in November to 5.4%. A stronger-than-expected print may lift the USD. Conversely, a soft reading USD will be enough to keep the bulls on the defensive and allow the pair to capitalize on its recent strong move. Still, the data should communicate some volatility and create some worthwhile trading opportunities.
From a technical perspective, the overnight strong move marked a fresh bullish breakout through the 61.8% Fibonacci level of the 1.3834-1.3161 decline. This follows a recent sustained move away from the 100-day SMA and supports the potential for additional gains. Therefore, there is a distinct possibility of testing a downside trend line resistance currently near the 1.3675-80 area. The mentioned hurdle extends from the swing high of July 2021, which, if cleared, will be seen as a new trigger for the bulls. The pair can then climb up beyond the 1.3700 mark, towards the next relevant resistance near the 1.3735 area. The momentum could be picked up further and allow the bulls to aim for a retest of the 1.3800 mark.
On the other hand, any downside towards the 1.3600 mark could be seen as a buying opportunity and could remain confined near the 61.8% Fibo. Resistance break point around 1.3575 area. This is followed by the 100-day SMA at the middle of 1.3500, which should now act as a turning point for trades. A solid break below could prompt some technical selling and pull the pair further towards 50% Fibo. level, key around the 1.3500 psychological mark. Some follow-through selling has the potential to pull the pair towards the 1.3430 area and 38.2% Fibo in the path towards the 1.3460-55 area. Levels/50-days SMA Confluence support near 1.3400 points.