After hitting a yearly high of 1.4248 on 1st June 2021, GBPUSD has slid into a persistent downtrend and just recently revisited a 12-month low at 1.3169 early this month. While there are domestic factors causing the weakness in the Pound, the pair’s depreciation could also be a result of a strengthening US dollar amid market risk aversion. The US Dollar Index (DXY), which tracks the greenbacks strength against a basket of major currencies is consolidating above 96 after a steep climb in November which saw the index soar from below 94.
BoE Interest Rate Hikes
While there are many factors at play for the GBPUSD, a major event that took place was the unexpected hike of interest rates by the Bank of England (BoE) which sent the pound higher against the greenback, before retracing to the same level pre-announcement. The expectation for the BoE interest rates liftoff in the December meeting was almost certain until the emergence of the omicron variant in November which caused the markets to cast doubt of the rate hike. Fundamentally, most criteria set out by the BoE for a rate hike were actually met but markets became pessimistic about the rate hike as the uncertainty around the new variant incited fear that economic recovery would once again be dampened by fresh curbs on social and economic activities. The surprise move last week saw UK’s central bank raising its main interest rate from historic low of 0.1% to 0.25% in the face of persistent inflation pressures and a tightening labour market.
Omicron weighs on sentiment
Under common circumstances, a surprise interest rate hike by a central bank would be a bullish news for its currency but what played out on the GBPUSD was a sharp pullback to test its yearly low after the rally that was short-lived. The movements in the forex market is nothing but a balancing act of various driving forces and for this instance, the fear of the omicron variant has the upper hand and has exerted some heavy pressure on the pound. The UK has reported record levels of Covid-19 cases, with the government warning that the full effects of the latest wave are still yet to be seen. Britain’s Deputy Prime Minister Dominic Raab also refused to rule out a tightening of social restrictions before Christmas, after bearing the news that twelve people in the UK have died with the omicron variant. In the UK, the effect of this fresh virus wave would be more strongly felt as the nation enjoyed largely loose covid restrictions, with no mandate to wear masks outdoor and relaxed travel restrictions. This larger than ever Covid-19 wave is dampening market optimism and has helped the safe haven US dollar strengthen against the pound.
Fed Taper & Rate Hikes
Against the backdrop of omicron-induced market risk aversion, the hawkish Fed continues to favour the US dollar buyers. Last Wednesday, Federal Reserve Chair Jerome Powell indicated that the ultra-easy monetary policy that started since the Covid pandemic is coming to a close, setting path for tightening polices to curb highest inflation in decades. The Fed will be doubling the pace of its tapering, from $15 billion per month to the current $30 billion per month. The bond purchase program which was set to complete in June 2022 will now be concluded by March, after which the Fed expects to start raising interest rates as many as three times in 2022.
Technical Analysis
GBPUSD is captured in a descending channel which stretched back to June 2021 and the pair has been trending in the lower half of the channel since November. Technical indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) validates the bearish momentum in the pair. The RSI reading at 39 suggests there is still room for further decline before entering into oversold territory. Looking ahead, we believe that the pair will head south to retest the yearly low at 1.3169. If price pierces below this support level, traders could aim for psychological level at 1.30. In the alternate scenario where the pair stages a rebound, the dynamic resistance level will provide headwind for GBPUSD.
Key events to watch this week:
Wednesday, December 22
GBP – Gross Domestic Product (QoQ)(Q3)
USD – Chicago Fed National Activity Index (Nov), Core Personal Consumption Expenditures (QoQ)(Q3), Gross Domestic Product Annualized (Q3), Gross Domestic Product Price Index (Q3), Personal Consumption Expenditures Prices (QoQ)(Q3), Consumer Confidence (Dec)
Thursday, December 23
USD – Core Personal Consumption Expenditures – Price Index (MoM)(YoY)(Nov), Durable Goods Orders (Nov), Nondefense Capital Goods Orders ex Aircraft (Nov), Personal Income (MoM)(Nov), Personal Spending (Nov), Michigan Consumer Sentiment Index (Dec), New Home Sales (MoM)(Nov)
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