Rising UK yields support a GBPUSD breakout
The GBPUSD has been in a protracted downtrend since May 2021, but recent events may have put a stop to the decline in the pound.
GBPUSD daily trend analysis
Following the Bank of England’s decision to raise interest rates by 15bps, the GBPUSD has now made a significant move to the upside and is pushing through the 20-period Donchian channel. This signals the potential for a new uptrend to be starting. Previous bullish breakouts since May 2021 have failed as the US dollar has been in an uptrend and the UK was under restrictions due to the COVID-19.
One reason why the current breakout could fail again is that the longer0term trend has been to the downside and as seen with the 50-period Donchian channel, price action is not making newer highs with this indicator, meaning there will be a lot of overhead resistance to push through. The main difference is that the Bank of England has actively pushed rates higher. We also have better than expected news circulating around the latest COVID-19 variant of concern, ‘Omicron’.
Science is starting to show that the variant may be more contagious but not as potent and therefore hospitalizations and serious illnesses may not be as bad as saying the Delta variant. This means PM Johnson has been able to hold off from increasing restrictions in the run-up to Christmas. By the new year, we should have more evidence, and hopefully, this still points to us all getting natural herd immunity rather than the need for lockdowns
Traders on the lower time frames may have already taken a breakout of the recent highs. On the H1 chart above I have illustrated where I would put my initial stop-loss order on a breakout like this
However, a better risk to reward could be achieved if we wait for a classic retest of the highs printed after the Bank of England’s rate decision.
The ActivTrades platform sentiment indicator shows that the bulls and bears have been evenly matched, but sentiments have drifted towards the sell-side slightly more. This only gives the bullish contrarian trade a slight advantage, but it also doesn’t hinder anyone from taking a breakout trade today.
Another positive for the pound is that the UK 10-year benchmark yields are rising faster than the US 10-year yields, having broken out of the descending channel post the BoE rate decision. The GBPUSD tends to follow the UK 10-year yield direction.