GBP/USD breaks resistance as traders price-in a dovish Fed

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Dec 16, 2020
  • The GBP/USD pair rose above a key level of resistance after the strong manufacturing and services PMIs.
  • According to Markit, the services PMI rose to 49.9 while the manufacturing PMI rose to 57.3.
  • Traders are also focused on the upcoming Fed interest rate decision.

The GBP/USD moved past a key resistance level as traders digested the mixed economic numbers from the UK ahead of the Fed decision. The pair is trading at 1.3530, which is the highest it has been since May 2018.

British pound has been rallying

UK business activity picks-up

The GBP/USD rose after relatively strong economic numbers from the UK. In a report, Markit said that the services PMI increased from 41.7 in November to 47.3 in December as the government allowed some businesses to reopen. This increase was relatively higher than the median estimate of 41.9. 

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Still, the services sector is going under pressure, since the PMI is below 50. This is mostly because many sectors of the industry are yet to recover. For example, hotels, restaurants, and pubs are still finding it difficult to re-open. Indeed, on Monday, the government asked several sectors like bars to close as the number of cases continued to rise.

The manufacturing sector continued to fire on all cylinders as demand and optimism continued. The PMI increased from 53.8 in November to 57.3. At the same time, the composite PMI, which tracks indices in the two sectors, increased from 49.0 to 50.7. 

However, economic numbers released earlier were not pleasing. According to the ONS, the country’s consumer prices declined by 0.1% in November leading to an annualised increase of just 0.3%. Further, the core CPI data, which excludes the volatile food and energy products, declined by 0.1% leading to a year-on-year increase of 1.1%. These numbers were all lower than the consensus estimates by analysts.

The GBP/USD is also rising ahead of the last interest rate decision by the Fed. While the Fed will likely not tweak interest rates, it could change its guidance. In a note to investors, analysts at TD Securities said they expect the bank to provide a new forward guidance of the quantitative easing program and then lengthen the weighted average maturity (WAM). They noted that this will be more bearish for the dollar.

GBP/USD technical outlook

GBP/USD
GBP/USD technical chart

The GBP/USD has been rising in the past few months. Today, it managed to move above the key resistance at 1.3528, which was its highest level on December 4. It is also slightly above the ascending trendline that’s shown in pink and the 25-day and 50-day least squares moving averages

Therefore, the pair will possibly continue rising as bulls aim for the next resistance at 1.3550. However, today being Fed day, there is a possibility of increased volatility. As such, you should use the tools provided by your forex broker to limit the potential loss.

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