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    GBPUSD: will the BOE disrupt the recovery rally?

    GBPUSD has been extending recent gains today as the dollar continues to consolidate. The driver of GBP strength includes positive UK economic data surprises and continued UK yield advantage, particularly against the EUR. This wave of GBP appreciation is serving to reinforce 1.4952 – the low from 23rd Jan – as a medium-term level of support, while we are close to key resistance at 1.5274 – the high from 6th Jan and the top of the recent range.

    What is driving the pound?

    • Economic data: the UK had a hat trick of good economic news this week with the PMI data for January beating expectations for the manufacturing, construction and services sectors. This suggests that the UK economy has started the year on a bright note after fears of a slowdown at the end of 2014.
    • The yield effect: In this environment investors are yield hungry and the UK is enjoying a fairly hefty yield advantage, particularly vs. Germany. 10-year UK Gilt yields are currently 1.52%, which compares with German y 10-year bond which is yielding a mere 0.35%. The extra 1.2% yield offered by Gilts could also be driving inflows into the pound.
    • Greece: as problems about Greece’s finances grow this could drive safe haven flows into the pound in the coming days and weeks as people dump the EUR in expectation of a re-run of the 2009 – 2012 sovereign debt crisis.
    • Dollar: the dollar is taking a breather as we lead up to US payrolls on Friday, which is also supporting GBPUSD.

    Economics, yields and safe haven flows are powerful drivers of the pound.  Aside from the dollar, the GBP is looking like the second most attractive currency in the G10 at the moment, which could support GBP’s performance in the coming days and weeks.

    We don’t expect the BOE to announce any policy changes at this meeting, and all 9 MPC members are likely to vote for remaining on hold. Thus, with the BOE maintaining the status quo for the foreseeable future, we think that the fundamental conditions are in place for a continuation of the GBP rally in the short term.

    The technical view:

    The technical view is also supportive of the pound, for now. This pair has witnessed some buying interest near support at 1.4952 – the low from 23rd Jan. However, GBPUSD needs to break key resistance at 1.5274 – the high from 6th Jan - to improve the short-term upside potential. Above here opens the way to 1.5345 – the high from Jan 5th, then 1.5590 – the high from the start of this year, although we may need to see the dollar weaken sharply before we would anticipate GBPUSD moving back above 1.55.

    In the longer-term, we  still think that the pound could be vulnerable to another dip below 1.50 towards key resistance at 1.4814 – the 2013 low – especially as we lead up to the UK election, or if the BOE surprises the market and re-introduces QE in the coming weeks. However, in the short term, the improving fundamental picture is fuelling the current rally. Expect an extension of this move if we can get above key ST resistance at 1.5274


    • The UK fundamental picture has improved at the start of the year.
    • This is boosting the pound, along with higher Gilt yields, especially compared to German yields.
    • GBPUSD is rallying into the BOE meeting.
    • We don’t expect the BOE to change policy at its meeting on Thursday.
    • The technical picture for GBPUSD could remain constructive if this pair breaks above ST resistance at 1.5274 – the 6th Jan high. If we can’t break through this level then we could drift back towards 1.50.
    • For now the longer term technical structure remains negative. The upcoming UK general election in May could also limit any fresh GBPUSD rallies.

    Figure 1:


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