Home Forex Market Analysis GBP/USD Bounces Back as Bets of No UK Negative Rates Rise

GBP/USD Bounces Back as Bets of No UK Negative Rates Rise

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GBP/USD Bounces Back as Bets of No UK Negative Rates Rise

The GBP/USD price rallied on Thursday afternoon ahead of the important UK retail sales numbers. The pair bounced from the intraday low of 1.3830 to a high of 1.3945.

Investors bet on the sterling

The British pound has been on a strong upward trend in the past few months. The GBP/USD has risen by more than 22% from its lowest level in March. Similarly, the EUR/GBP has dropped by almost 10%, while the GBP/CHF price has jumped by more than 12%. 

This performance is mostly because investors have been relatively bullish on the currency. For one, they believe that it was vastly undervalued because of the intrigues about Brexit. With a Brexit deal done, investors have moved back to the currency. 

In addition, foreign investors have come back to the United Kingdom following the conclusion of the Brexit talks. A recent paper estimated that foreign investors have already bought UK stocks worth more than $4 billion in the past few months.

Most importantly, the Bank of England (BOE) has been relatively concerned about pushing interest rates to the negative zone. In the most recent BOE interest rate decision, the governor said that it was too early to talk about negative rates. The worry is that negative rates would have a negative impact on the banking sector, a leading employer in the UK.

Economic numbers released this week revealed that UK’s inflation was relatively better than expected. In January, the headline consumer price index (CPI) rose by 0.7%, while the core CPI rose by 1.4%. With oil prices rising, analysts believe that the overall inflation rate will keep rising. As such, the bank will not have an incentive to lower rates further.

UK handling of the virus

Meanwhile, investors have been relatively positive about the UK’s handling of the virus. The country was the first one to start mass vaccinations. This week, data from the country revealed that the country has already vaccinated more than 15 million people. 

Still, there are potential risks for the UK. For one, the real impacts of the pandemic will become clear in the next few months when the government’s furlough program ends. In this program, the government is paying millions of people’s salaries, thus raising the total public debt. 

On Friday, the GBP/USD will react to the closely-watched retail sales numbers and the flash manufacturing and services PMI. Economists polled by Reuters expect the data to show that the headline retail sales dropped by 1.3% in January. They also see the core retail sales rising by 2.2%. This prediction is mostly because most people stayed at home in January because of the lockdowns. 

Markit and CIPS will also publish the flash PMI numbers. The overall view is that the manufacturing sector remained steady above 50 while the services PMI rose from the previous 39.5. 

Other numbers that will move the GBP/USD on Friday will be the US existing home sales numbers.

GBP/USD technical outlook

GBP/USD technical outlook

On the daily chart, we see that the GBP/USD has been on a strong rally for months. Today, it erased the losses made in the past two days and soared to the highest level since March 2018. The pair has also moved close to the upper side of the ascending channel. It is also being supported by the 25-day and 50-day moving averages. Therefore, the pair will likely continue rising as bulls target the upper side at 1.1450.

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