Daily Price Outlook
During the European trading session, the GBP/USD currency pair extended its bullish momentum, trading firmly around the 1.2197 level and reaching an intraday high of 1.2222.
The rise in the currency pair was somewhat unexpected, as weak UK retail sales data for December typically signals a slowing economy and would usually weaken the GBP.
However, the increase in demand for UK gilts, which are considered safer investments during uncertain times, may have supported the GBP. Additionally, a broader appetite for riskier assets could have played a role in the pair's upward movement, as investors seemed willing to take on more risk despite the weak economic data.
Furthermore, the pair benefited from a weakening US Dollar as its safe-haven appeal diminished ahead of the swearing-in ceremony of Donald Trump as President.
GBP/USD Gains Driven by Weak Retail Sales, Lower Gilt Yields, and BoE Rate Cut Expectations
On the GBP front, the gains in the GBP/USD currency pair were partly driven by increased demand for UK gilts.
Despite weak UK retail sales data for December, which typically signals a slowing economy, the rising appetite for riskier assets ahead of US President-elect Donald Trump’s inauguration supported the Pound.
The demand for UK gilts caused yields on 30-year bonds to drop, from a more-than-26-year high of 5.47% on January 13 to around 5.20%.
This decline in yields reflects investors seeking the safety of government bonds, which in turn helped lower borrowing costs for the UK government.
However, the surprise drop in the UK Retail Sales for December added further pressure, accelerating expectations for the Bank of England (BoE) to adopt a more dovish stance. Retail Sales contracted by 0.3%, much worse than the expected 0.4% growth.
This disappointing data led analysts, including those at Oxford Economics, to forecast a 100 basis point rate cut by the BoE, bringing interest rates down to 3.75% by the end of the year.
Despite the Pound's recent rise, UK gilt yields have fallen more sharply, reflecting growing concerns about a potential BoE rate cut.
The drop in yields has kept the focus on dovish BoE expectations, which tend to be negative for the Pound.
However, UK equity markets have surged as Chancellor Rachel Reeves announced she wouldn’t need to raise taxes or cut public spending to meet her economic goals.
Looking ahead, the next key event for the Pound will be the release of UK employment data for the three months ending November, due on Tuesday, which could impact further market movement.
US Dollar Weakens Ahead of Trump’s Inauguration, Outlook Remains Positive Amid Economic Policy Expectations
On the US front, the broad-based US Dollar weakened on Monday as the safe-haven appeal of the currency diminished ahead of Donald Trump’s swearing-in ceremony as President. This helped the GBP/USD pair rebound near the 1.2200 level during the European session.
The US Dollar Index (DXY), which measures the Dollar's strength against six major currencies, dropped to around 109.00, reflecting reduced demand for the Greenback.
Despite this short-term weakness, the broader outlook for the US Dollar remains optimistic. Investors expect Trump’s economic policies to be growth-focused and inflationary, potentially supporting the US economy in the long run.
Reports suggest Trump plans to sign over 200 executive orders on his first day, potentially addressing issues like immigration, tariffs, and tax cuts, which could have significant economic implications.
Looking ahead, the US economic calendar is relatively light this week, with the key release being the S&P Global preliminary PMI data for January, due on Friday. According to the CME FedWatch tool, traders are anticipating more than one 25-basis-point interest rate cut this year, with the first expected in June.
GBP/USD – Technical Analysis
GBP/USD is trading at $1.22141, up 0.44%, as the pair edges higher in early trading amid cautious market sentiment. The pound has shown resilience, but upside momentum remains constrained by key resistance levels, with investors closely monitoring macroeconomic data and central bank cues.
On the 4-hour chart, the immediate pivot point at $1.22453 is a crucial level to watch. A break above this threshold could pave the way for further upside, targeting immediate resistance at $1.23125, followed by higher resistance levels at $1.24064 and $1.24962.
However, failure to clear the pivot point may invite renewed selling pressure, with immediate support located at $1.21034, followed by deeper levels at $1.20174 and $1.19346, which could act as potential rebound zones if downward momentum intensifies.
Technically, the 50-day EMA, currently positioned at $1.22441, suggests a neutral to bearish outlook, as the price remains slightly below this key level. A sustained move beneath the EMA may indicate further bearish pressure, potentially driving the pair toward support zones.
In conclusion, a short position below $1.22465 could provide an attractive risk-reward setup, with a take-profit target set at $1.21019 and a stop-loss placed at $1.23155 to mitigate potential upside risks.
Traders should remain vigilant as market dynamics could shift swiftly amid changing economic conditions and geopolitical factors.
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