GBP/USD: No end in sight for the pound sterling rally

The GBP/USD rally has accelerated. The pair has risen for the past six consecutive weeks and is trading at the highest level since April 23, 2018. It has also risen in the past five straight days. 

BOE supports the sterling

The GBP/USD has risen, in part because of the overall stronger British pound. The sterling has risen to the highest level since May 2020 against the euro. It has also risen substantially against the Swiss franc. In total, the British pound index has risen to the highest level since April 2018.

This performance is mostly because the Bank of England (BOE) seems hesitant about implementing negative interest rates as most analysts were expecting. 

In its decision last week, the bank said that it was still assessing the potential impacts of sub-zero interest rates in the country. Before this decision, many analysts were expecting the central bank to hint of potential rate cuts.

Indeed, even with the economy in a large contraction, some analysts have started to price-in higher rates in the UK. In an editorial, Jeremy Warner wrote that:

“… the next move in interest rates will be up, not down. That was the inference that markets drew from last week’s quarterly Monetary Policy Report from the Bank of England, and it is hard to disagree.”

The GBP/USD has also soared because of the weak US dollar. The dollar index has continued to decline as analysts at most banks and forex spread betting brokers start pricing-in a widening budget deficit in the US. With another $1.9 trillion on its way, and with tax collection falling, analysts believe that the US will have no choice but increase its borrowing.

Later today, the pair will react to the US inflation numbers that will provide hints about potential interest rate hikes by the Fed. Economists believe that the headline CPI will come in at 1.5%, 0.5% lower than the Fed’s target of 2.0%.

GBP/USD technical outlook

The GBP/USD has been in a strong uptrend, gaining by more than 20% from its lowest level in March 2020. On the daily chart, the price has moved above the previous resistance of 1.3483 and the 25-day and 15-day exponential moving averages (EMA). It has also risen above the lower side of the ascending channel and the ichimoku cloud. Therefore, the pair will likely continue rising as bulls target the upper side of the channel at 1.3900.