**GBP/USD Extends Two-Day Bullish Recovery as 1.34 Holds**
*By Ross J Burland, FXStreet*
The GBP/USD currency pair has demonstrated notable resilience, extending its two-day bullish recovery and defending the key psychological support at 1.3400. This price behavior reflects both broad dollar weakness and underlying fundamental developments that could steer the pair’s course in the short to medium term. In this article, we examine the drivers behind GBP/USD’s current trajectory, technical outlook, upcoming risk events, and analyst sentiment.
**Fundamental Drivers Supporting GBP/USD**
Several factors have contributed to the recent upward momentum in GBP/USD:
– **US Dollar Weakness**: The US Dollar Index (DXY) has pulled back from recent highs as bond yields have softened and investor sentiment has brightened globally.
– **Bank of England Expectations**: The market has priced in hawkish expectations from the Bank of England (BoE), believing it to be one of the more proactive central banks in responding to rising inflationary pressures.
– **UK Economic Data**: Recent data releases from the UK have outperformed expectations, lending support to sterling and suggesting that the UK economy is navigating the global uncertainty with relative strength.
– **Brexit Developments**: While tensions between the UK and the EU had previously weighed on the GBP, markets have, at least for the moment, largely discounted Brexit-related disruptions, focusing more on macroeconomic outcomes and central bank policy.
– **US Economic Uncertainties**: Ongoing debate in the US over fiscal stimulus, the trajectory of pandemic recovery, and concerns about the persistence of inflation have all contributed to the choppy price action in the greenback.
**US Dollar Pullback: Context and Consequences**
The dollar’s retreat coincided with dovish commentary from Federal Reserve officials, who have attempted to temper market fears of aggressive tightening. Despite robust US labor market readings and mounting inflation concerns, the Fed’s message has been that tapering does not equate to rate hikes and that policy normalization will proceed with caution.
The resulting decline in US Treasury yields has eroded the yield differential favoring the dollar, providing space for GBP/USD to recover from recent lows.
**Bank of England: Forward Guidance and Rate Hike Speculation**
The Bank of England stands out among G10 central banks for its forthrightness regarding potential rate hikes. Markets are currently pricing in a BoE rate hike as early as the coming months, spurred on by elevated inflation readings and guidance from the central bank itself.
Key themes in BoE commentary include:
– Downward pressure on supply chains fueling inflation.
– Concerns over energy price shocks and their impact on consumer prices.
– Emphasis on monitoring wage dynamics and persistent inflationary trends.
If the BoE follows through on its guidance, sterling could be further supported, although the risk of “buy the rumor, sell the fact” remains if the market perception shifts or data disappoints.
**Technical Analysis: GBP/USD Clings to Key Level**
From a technical perspective, GBP/USD’s recovery above 1.3400 is an encouraging sign for bulls, suggesting that the worst of the recent downtrend may be over, at least for now. Key technical takeaways include:
– **Support at 1.3400**: This level has served as a firm floor, drawing in buyers and alleviating downside pressure.
– **Short-Term Resistance**: Immediate resistance lies at the 1.3500 psychological level and then at 1.3530, coinciding with the 50-day moving average.
– **Momentum Indicators**: Daily momentum oscillators such as the Relative Strength Index (RSI) have rebounded from oversold territory, signaling a potential continuation of the upward move.
– **Moving Averages**: The 21- and 50-day moving averages remain key guides for near-term direction, with any sustained move above these averages likely to further embolden buyers.
– **
Read more on GBP/USD trading.