The GBP/USD pair has experienced a notable rebound, gaining momentum after initially declining to a low of 1.2100 earlier this month. This movement coincides with market reactions to recent executive orders signed by the new US President, and recent UK economic data releases.
Market Drivers
The initial decline in GBP/USD occurred amidst broader US dollar strength. However, the pair has since reversed course, rising to a high of 1.2338. This rebound appears partly driven by investor relief that the US President’s initial executive orders did not immediately impose tariffs on key trading partners like those in Europe, Canada, and Mexico. Despite this, the President has stated the possibility of future tariffs remains on the table.
In the UK, a mixed labor market report also contributed to market volatility. While the unemployment rate increased from 4.3% to 4.5% in November, the economy added 35,000 jobs over the preceding three months, and average earnings saw an increase. These mixed figures make it hard to form a definitive conclusion on the health of the UK labor market.
Concerns remain about the UK economy’s growth trajectory, particularly as retail sales have shown weakness in December. The UK’s increasing debt burden, estimated at approximately £100 billion per year for debt servicing, also raises questions about the nation’s fiscal health.
Technical Analysis & Potential Outlook
From a technical perspective, GBP/USD has shown signs of a potential bullish shift. The pair has decisively broken above the key resistance level at 1.2300, which was previously a swing low observed in April 2024. This breakout is further supported by the MACD indicator, which has formed a bullish crossover. The Relative Strength Index (RSI) is also trending upwards, indicating increasing upward pressure.
Currently, the price is approaching the 25-day moving average, located near 1.2400. This level could act as the initial target for this potential upward move. A continued break above this level could lead to testing the 50-day Exponential Moving Average (EMA) around 1.2545.
The pair appears to be undergoing a “buy-the-dip” scenario, following its sharp declines pre-inauguration. However, this view should be tempered by upcoming key events, such as the Federal Reserve and Bank of England’s interest rate decisions next week.
Potential Trading Considerations
- Bullish Scenario: Traders looking to capitalize on the potential upward momentum could consider a long position with a target near the 25-day moving average around 1.2400, with a potential subsequent target near the 50 EMA at 1.2545. A stop-loss could be placed at 1.2200.
- Bearish Scenario: Given the recent rally, traders might also consider a short position if the pair fails to maintain its upward momentum. A potential profit target could be placed near 1.2200, with a stop-loss at 1.2450.
Important Notes
- The current analysis suggests that the pair may have bullish potential in the near term, with targets near the 25 and 50-day moving averages. However, traders should be aware that this trend can shift based on macro economic data or geopolitical developments.
- The market’s focus is shifting towards the policy proposals of the new US administration.
- Upcoming central bank decisions could significantly impact GBP/USD volatility.
This analysis should not be taken as financial advice. Traders should always conduct their own research and risk assessments before making trading decisions.
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