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GBP/USD price analysis: bullish channel bounce or breakout?

By Piero Cingari

17:11, 1 December 2021

Close up of a pound coin, bearing a portrait of Queen Elizabeth II, rests on a US dollar bill
What will be the effect of upcoming central banks’ policy meetings on the GBP/USD rate? – Photo: Shutterstock

The pound sterling and US dollar pairing lost 2.7% in November, following a positive performance by cable (GBP/USD) in October (up 2.4%).

The currency pair came under pressure early last month when the Bank of England (BoE) opted to maintain interest rates at current levels, disappointing market expectations for a 15 basis point (bp) hike. Since then, the pound has continued to lose value versus the dollar, owing to increased market expectations for US Federal Reserve rate rises in 2021 and, more recently, the discovery of the Covid-19 Omicron variant, which has harmed the risk appetite on the pound.

From a fundamental point of view, monetary policy plays a key role in this phase for the GBP/USD pair. The Fed will convene on 15 December and the BoE the following day, only a few days after the publication of key inflation data in the US and the UK.

The technical picture shows that the GBP/USD pair has been trading within a descending channel since May 2021, with the price rebounding from the lower bound of the channel lately.

Positive news on the pandemic front and fresh signals of a BoE rate hike might potentially give confidence to the pound bulls. On the other hand, if risk sentiment deteriorates further, or the bank signals its intention to buy time in December, cable may break out of the bearish channel, boosting the likelihood of challenging the psychological level of 1.30.

GBP/USD: fundamental analysis

A chart comparing UK-US short-term yields and GBP/USDGBP/USD vs 3-year UK-US spread as of 1 December 2021 – Credit: Koyfin

Monetary policy has been recently a key driver for the GBP/USD currency pair, as hawkish signals from one of central bank are able to give greater appeal to its respective currencies.

Short-term differences in UK-US yields are a key barometer to measure monetary policy divergences between the Bank of England and the Fed. Over the past two months, the spread between 3-year UK-US yield has dropped to -27bps from a slightly positive territory, along with a weakening of the pound against the US dollar.

This week, Fed chair Jerome Powell hinted that inflation is no longer transitory, warning that a tapering of more than $15bn a month cannot be ruled out. While in late November his UK counterpart, Bank of England governor Andrew Bailey, opened up the possibility of a rate hike if the economy evolved in line with expectations.

According to market-based probabilities on the Fed’s interest rates in 2022, three hikes by December next year are more likely than not, but the Omicron variant clearly poses a risk for dollar bulls.

AUD/USD

0.66 Price
-0.830% 1D Chg, %
Long position overnight fee -0.0074%
Short position overnight fee -0.0008%
Overnight fee time 22:00 (UTC)
Spread 0.00006

GBP/USD

1.26 Price
-0.590% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 22:00 (UTC)
Spread 0.00013

AUD/USD_zero

0.66 Price
-0.830% 1D Chg, %
Long position overnight fee -0.0074%
Short position overnight fee -0.0008%
Overnight fee time 22:00 (UTC)
Spread 0.00006

EUR/USD

1.08 Price
-0.530% 1D Chg, %
Long position overnight fee -0.0080%
Short position overnight fee -0.0003%
Overnight fee time 22:00 (UTC)
Spread 0.00006

If the BoE raises interest rates in December, it will be the first major central bank to do so since the pandemic began, granting the pound this privilege. However, another bank pushback might reawaken the pound’s bears.

Finally, Brexit and the ongoing energy crisis are two other factors weighing on GBP/USD, as highlighted last month by Capital.com.

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GBP/USD: technical analysis

A chart showing a technical analysis of the GBP/USD pairingGBP/USD price analysis: bullish channel bounce or breakout? – Credit: Capital.com

Since May 2021, the GBP/USD pair has been trading within a bearish channel, with the price recently recovering to 1.332 from the channel’s lower trendline.

The 14-day relative strength index (RSI) was last at 35.17 on the daily chart, after almost hitting the oversold line on 11 November. However, while the GBP/USD exchange rate recently slid to a new low near 1.3300 level, the oscillator remained above November’s lows, forming the so-called bullish divergence.

The 50-day simple moving average (SMA) is currently at 1.3571, or 2% over the current price, while the 200-day SMA lies at 1.3811, or 3.6% above last price.

If the rebound from present levels is confirmed in the coming sessions, perhaps by breaking the resistance above the 1.3390-1.34 area, the pair may continue to trade inside the channel in the run-up to the central banks’ meetings.

Pound-related unfavourable headlines may prompt bears back into the fray, raising the possibility that cable will break the channel lower and pursue the next support level at the psychological level of 1.30.

Read more: No Bank of England rate hike, but what’s next for GBP/USD?

Markets in this article

GBP/USD
GBP/USD
1.26323 USD
-0.00744 -0.590%

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