Home Forex Market Analysis GBP/USD Is on the Cusp of a Bullish Break-Out to 1.3900

GBP/USD Is on the Cusp of a Bullish Break-Out to 1.3900

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GBP/USD Is on the Cusp of a Bullish Break-Out to 1.3900

The GBP/USD is at an important resistance level, helped by the relatively hawkish Bank of England (BOE) and the ongoing stimulus talks in the United States. On Monday afternoon, the currency was trading at 1.3725, which was a few pips below the year-to-date high of 1.3765.

Bank of England supportive

The UK economy is going through a tough period, as evidenced by the recent services PMI data. According to Markit, the country’s services PMI dropped to below 40 in January because of the third lockdown imposed by the government. 

As a result, the UK government has unleashed its biggest stimulus package ever. Through its furlough program, it is paying millions of workers every month. Also, it has unleashed billions of pounds to support small and medium-sized companies. Subsequently, the UK public debt has soared to the highest level in decades. 

It is against this backdrop that the BOE met last week. The members left interest rates and the ambitious quantitative easing program intact. Also, in a statement, Governor Andrew Bailey said that the bank was still studying negative interest rates. He said that they were not necessary, helping boost the British pound and the GBP/USD.

This week, there will be limited major economic numbers from the UK. The most significant number will come out on Friday when the Office of National Statistics (ONS) will publish the country’s GDP numbers. Still, because of the lockdowns, economists believe that the UK economy sunk into another contraction in the fourth quarter after bouncing back in Q3. 

Focus on the United States

The GBP/USD is also moving in reaction to the weak US dollar. After weeks of rising, the US dollar erased some of those gains on Friday when the US released weak employment numbers. According to the government, the country added more than 40,000 jobs in January. That was lower than the initial estimate by ADP, which showed that the economy added 140,000. Still, this addition was substantially lower than what analysts were expecting.

As a result, many investors believe that there will be an urgency by the new administration to implement another round of stimulus. In fact, the two houses in Washington passed the initial steps of a $1.9 trillion stimulus package last week. This means that, after reconciliation, the deal could pass in the next few weeks. 

The stimulus has two impacts on the GBP/USD. First, it will help accelerate the recovery of the American economy and push the Fed to hike interest rates earlier than expected. That would be bearish for the GBP/USD because it will lead to a stronger dollar. Second, it will likely devalue the US dollar by providing trillions of dollars to the economy. 

Meanwhile, later this week, the pair will react to the latest US inflation numbers that will come out on Wednesday. If the numbers are strong, it will be a bullish sign for the US dollar because it will imply that the Fed will move faster than expected.

GBP/USD technical outlook

GBP/USD technical outlook

Turning to the daily chart, we see that the GBP/USD has been on a strong uptrend. However, it is struggling to move above the current level because of the substantial resistance at 1.3766. Also, the pair has formed an ascending channel that is shown in blue. Therefore, in the near term, I suspect that the price will break-out higher as bulls attempt to test the upper side of the channel at 1.3900. However, a drop below the 4th February low of 1.3565 will invalidate this trend.

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