GBP/USD: Here’s why the sterling rally is running out of steam

Written by: Crispus Nyaga
January 15, 2021
  • The GBP/USD pair has been in a strong upward trend in the past few months.
  • Data released today raised concerns about a double-dip recession in the UK.
  • A pullback is possible in the near term

The GBP/USD is on track for its first weekly gain this year even as the risks of a double-dip recession increased. It is trading at 1.3653, which is close to its highest level in two-and-a-half years. 

UK double-dip recession

The UK economy slumped by more than 20% in the second quarter of last year and rebounded by 16% in the third quarter. Now, new data released by the Office of National Statistics (ONS) is raising concerns about a double-dip recession. 

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The economy contracted by 2.6% in November last year as the country continued to battle the new wave of the virus. That was the first contraction since April last year. It was also lower than October’s growth of 0.6% and 8.5% in February before the pandemic started. Therefore, since the situation was worse in December, there is a possibility that the economy contracted in Q4.

The GBP/USD is also reacting to the weak trade, industrial, and manufacturing production data from the country. Industrial production declined by 4.7% in November while manufacturing production fell by 3.8%. The country’s trade deficit widened to more than £16 billion.

Therefore, these numbers, and the ongoing lockdown, is putting the BOE under intense pressure to lower interest rates further. This week, a member of the monetary policy committee made the case for such rates citing the success in Sweden and Japan. 

However, while Andrew Bailey lamented about the economy being in its “darkest hour”, he also warned about the complexity of negative rates. 

Investors in forex are also reacting to the relatively dovish tone by Jerome Powell yesterday. In a speech, he warned that the economy was still facing significant challenges. He added that “now is not the time” to start talking about a change of monetary policy. Some of his colleagues like Raphael Bostic and Richard Kaplan this week hinted at a change of policy later this year and in 2022.

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GBP/USD technical outlook

GBP/USD

The GBP/USD has been on a strong upward trend in recent months. However, on the weekly chart, the pair has found a substantial resistance near the 78.6% Fibonacci retracement level. Also, the price is still above the important support at 1.3476 and the 25-day and 50-day exponential moving averages. 

Therefore, while the overall trend is bullish, the pair could also go through a pullback to the 61.8% retracement at 1.3247. This is almost 3% below the current level.