GBP/USD Fundamental Backdrop

Cable reached a high of 1.23420 against the greenback in Asian trade before the European open brought a modest dollar recovery pushing the pair back below the 1.2300 handle. The initial bounce in the Asian session could be attributed to the news over the weekend regarding the relaxation of ‘Covid Zero’ protocols in China boosting overall sentiment.

Friday’s US NFP report failed to keep dollar bulls interested as gains made following the release were surrendered by the end of the US session. The jobs data on Friday may still be on the mind of investors as wages (average hourly earnings) continued to show growth in the US hinting that inflationary pressures remain a concern. Despite the increase in wages the probability of a 50bps hike by the Fed at its upcoming meeting continued to increase (80% today vs 76% pre-NFP). The only significant data out today is the ISM non-manufacturing PMI for November which could provide some support to the dollar should it beat estimates.

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The cable on the other hand has limited high-impact data releases this week while the economic outlook remains cloudy. The recent bounce has had more to do with dollar weakness and improving market sentiment than any significant changes to the UK's outlook moving forward. The recent inflation printout of the UK showed food prices continue to rise which could in theory dent sales around the festive season as households prioritize essential purchases.

From a technical perspective, GBP/USD remains in the overbought territory while moves continue to be driven by the dollar index and broader sentiment. We remain above the 200-day MA which could provide support should we see a retracement. Given that the Federal Reserve and the Bank of England have entered their blackout periods and a lack of data from the UK there remains a possibility that the GBP/USD struggles to maintain its recent momentum. On the upside 1.2500 remains a key psychological barrier that could cap any further gains. A return of some dollar strength could bring the support at the 1.2000 level into play.

GBP/USD Daily Chart – December 5, 2022

(Click on image to enlarge)

Source: TradingView

IG Client Sentiment Data: Mixed

IGCS shows retail traders are currently SHORT on GBP/USD, with 61% of traders currently holding short positions. At DailyFX we typically take a contrarian view to crowd sentiment, and the fact that traders are short suggests that prices could GBP/USD may continue to rise.

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