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Bullish view

• Buy the GBP/USD pair and set a take-profit at 1.2850.
• Add a stop-loss at 1.2700.
• Timeline: 1-2 days.

Bearish view

• Set a sell-stop at 1.2780 and a take-profit at 1.2700.
• Add a stop-loss at 1.2850.

The GBP/USD exchange rate rally gained steam on Thursday morning in a low-volume environment. The pair rose to a high of 1.2790, its highest point since August 2022. It has risen by over 6% from its lowest point in October.

US dollar index sell-off

The forex market has been characterized by low volume and an extremely weaker US dollar. Volume has been thin because of the ongoing holiday season, with many big investors being closed for the year.

The US dollar has continued moving downwards as a risk-on sentiment continued. The dollar index retreated by over 50 basis points to $100.61, much lower than the year-to-date high of $107. The greenback has dropped against most developed country currencies like the euro, Japanese yen, and Swiss franc.

It has retreated as traders have embraced a risk-on sentiment now that US inflation has continued falling. The most recent data revealed that the headline inflation dropped to 3.1% in November, much lower than the 2022 high of 9.1%.

Therefore, there is a likelihood that the Federal Reserve will move from a hawkish tone to a dovish one. Data by the CME shows that the Federal Rate Monitor tool shows that economists have a 80% chance of a rate cut coming in March.

The Bank of England (BoE) is also expected to start cutting rates in 2024 now that the economy is in a state of stagflation. The most recent data showed that the British economy contracted in the third quarter.

While inflation also declined in November, it remains much higher than the BoE target of 2.0%. Therefore, economists see the BoE starting to cut rates as soon as in its March meeting if inflation continues falling.

GBP/USD technical analysis

The GBP/USD pair continued its uptrend as the risk-on sentiment accelerated. On the daily chart, the pair has remained above the 50-day moving average and the first support of the Schiff pitchfork.

Additionally, the pair has risen above the key support at 1.2588, its lowest point on June 29th. The MACD has continued rising and is above the neutral point. Therefore, the pair will likely continue rising as traders target the psychological level at 1.2850. The stop-loss of this trade will be at 1.2650.

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