GBPUSD Cautious reaction after central banks

The U.S. dollar had a topsy turvy end of the week following the adoption by the Bank of England and the European Central Bank of slightly more restrictive positions than the markets had expected, which gave a boost to the pound sterling and the euro. Similarly, last night the Bank of Japan announced the end of its accommodative policy to eventually return to the one that prevailed before the pandemic. These changes were expected by the markets, but they reduce the difference in policy between the Fed and other central banks.

The British pound edged higher after climbing as high as $1.3375 for the first time since November 24, as the BoE surprised most market participants by becoming the first major central bank to raise interest rates since the pandemic began. The BOE raised rates by 0.15 basis points to 0.25% (ignoring the rise in the omicron variant).

The euro remained roughly stable after hitting its highest level this month at USD 1.1360 after the ECB outlined plans to remove monetary stimulus in the coming quarters, though it also emphasized policy flexibility.

A cautious ECB pullback and a surprise BoE hike resulted in selloffs before year-end, especially given the long and unbalanced positioning on the dollar.

However, the weakness in the dollar index is not expected to extend, with the Fed ahead of the ECB in terms of the tightening cycle, and dips to the 95.50 level on the index are a buying opportunity. The start of the year could see buying positions in the greenback accumulate.

On Wednesday, the Fed said it would accelerate the tapering of its bond-buying program to end in March, which would result in three quarter-point rate hikes next year. The dollar index initially hit a three-week high before beginning a decline.

The different paths taken by the major central banks underscore the deep uncertainties about how the rapidly spreading omicron variant will affect economies and what each of them needs to do to combat runaway inflation, which is hitting the U.S. and Britain hard, but Europe less so for now.

From a technical perspective, the GBPUSD traded mixed in the end of the week along the polarity line that acts as resistance at 1.3370. The high wick that appeared at its contact indicates the presence of sellers. This level is now key in the short term for the evolution of the cable.

The GBPUSD is in a downtrend and the rebound of the last 3 sessions is only a correction. The risk is therefore to see a failure on the resistance and a negative recovery towards the December 2020 low at 1.3140, a level which should be targeted in the near term.

(Chart Source: Tradingview 19.12.2021)

The crossing of 1.3370 would allow considering a more pronounced rebound towards 1.3607.

Support & Resistance Levels:

R3      1.3830

R2      1.3607

R1      1.3370

S1      1.3140

S2      1.3000

S3      1.2850

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.