The fundamentals and technicals all currently suggest higher prices in the GBPUSD. However, one key event like a rate hike from the USA could undo that, though very unlikely. What is more likely is that COVID-19 cases rise, and the government must act as they did before, which would be a drag on the economy and the pound. The Chancellor also must walk a thin line between fiscal responsibility and giving the economy enough room to grow.
Forex Analysis - GBPUSD
The pound is strengthening against the yen, US dollar, Swiss franc, and Canadian dollar and the bull run could be curtailed by the UK's Autumn Budget and the Bank of England's policy meeting the following week. Both are interconnected and the outcomes from each may be impacted by increased levels of Covid, with the worry that the positive numbers will reach 100k this winter. As our vaccine efficacy runs low and we need a booster, deaths, and hospitalizations are on the rise. In the last week, hospitalizations increased by 11%.
September's weaker-than-expected CPI data has quietened the short sterling market and so far, hasn’t had a negative impact on GBP. Although this week's inflation report is unlikely to warrant an aggressive rate hike (40bps) from the Bank of England, it still merits pricing for a 15bps increase to the Bank Rate of 0.25%.
Today should be a relatively quiet session, before tomorrow's release of UK Retail sales and PMI data, which should at least move the needle to close the week. The US dollar index has formed a swing high at resistance and is retreating amid the return of a healthier risk environment. The market may have now repriced expectations of Fed policy and considering the economic headwinds may see an announcement of tapering, temporary. The near-term outlook does not appear to indicate material further DXY downside but a surprise from the FOMC in November would.
With a slightly weaker US dollar, the GBPUSD has broken out of a descending channel. Usually, this would result in a retest of that level to prove to the bulls that support was firmly in. 1.3420 is my line in the sand at which point if GBPUSD were to breach it, I can only see the downside. If we stay above it for the near term I am looking for a test of the 1.4000 and then the recent swing high around 1.4200.
On the hourly chart, the 3 moving averages are all stacked in a bullish fashion and the price action is breaking through significant resistance and confirming it is supported before moving higher. The next ceiling the bulls need to crack will be 1.3880 from which a sustained push towards those 1.4000 levels can continue.