- GBP/USD struggles to gain any meaningful traction and oscillates in a range on Thursday.
- The prospects for more BoE rate hikes underpin the GBP and lend support to the major.
- Subdued USD demand contributes to limiting the pullback from over a one-month top.
The GBP/USD pair finds support ahead of the 1.2300 mark on Thursday and for now, seems to have stalled the overnight pullback from its highest level since December 14. The lack of follow-through buying, however, warrants caution for bullish traders and before positioning for an extension of the recent appreciating move witnessed over the past two weeks or so.
The British Pound is underpinned by expectations that the Bank of England will continue raising interest rates to combat stubbornly high inflation. The bets were lifted by the stronger wage growth data released on Tuesday, which is expected to keep inflation elevated. Furthermore, the headline UK CPI – though fell to a three-month low in December – is still running at levels last seen in the early 1980s. Apart from this, subdued US Dollar price action acts as a tailwind for the GBP/USD pair, at least for the time being.
The US economic data released on Wednesday showed that retail sales fell in December by the most in a year and manufacturing output recorded its biggest drop in nearly two years. This, in turn, reinforced the prospects for a less aggressive policy tightening by the Fed and leads to a further decline in the US Treasury bond yields. In fact, the yield on the rate-sensitive two-year US government bond falls to its lowest level since October amid a greater chance of a 25 bps rate hike in February and keeps the USD bulls on the defensive.
That said, several FOMC members indicated on Wednesday that they will push on with more interest rate hikes even as inflation shows signs of easing and economic activity is slowing. This, along with the prevalent risk-off environment, could benefit the greenback’s relative safe-haven status and cap the upside for the GBP/USD pair. The weaker US macro data comes amid worries about economic headwinds stemming from the worst yet COVID-19 outbreak in China. This, in turn, fuels recession fears and weighs on investors’ sentiment.
There isn’t any relevant market-moving data due for release from the UK on Thursday, leaving the GBP/USD pair at the mercy of the USD price dynamics. Later during the early North American session, traders will take cues from the US economic docket, featuring the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and the housing market data. This, along with speeches by Fed officials, the US bond yields and the broader risk sentiment, will drive the USD demand and provide some impetus to the GBP/USD pair.
From a technical perspective, nothing seems to have changed for the GBP/USD pair and the near-term bias still seems tilted in favour of bullish traders. Hence, any meaningful pullback below the daily swing low, around the 1.2310-1.2300 area, might be seen as a buying opportunity. This, in turn, should help limit the downside for spot prices near the 1.2250 horizontal resistance breakpoint. That said, a convincing break below the latter might prompt some technical selling and accelerate the slide towards the 1.2200 mark.
On the flip side, the 1.2400 round figure now seems to act as an immediate resistance ahead of the overnight peak, around the 1.2435 region. Some follow-through buying beyond the monthly month top, near the 1.2445 area touched in December, should allow the GBP/USD pair to reclaim the 1.2500 psychological mark for the first time since June. The upward trajectory could get extended further towards the 1.2555-1.2560 intermediate hurdle en route to the 1.2600 mark.