The GBPUSD price bounced back on Wednesday as the US dollar declined broadly. The pair rose to a high of 1.3500, which was the highest level since November 19th. It has risen by about 2.50% from its lowest level this year.
The GBPUSD pair rose mostly because of the risk-on sentiment that is in the market. This sentiment stems from the fact that investors are optimistic that we are in the final months of the Covid-19 pandemic.
While the number of Omicron cases is surging around the world, there is some good news. For example, the UK is confirming >180,000 daily cases while the US recorded >267k daily increase on Tuesday.
These numbers are scary, considering that most of them are breakthrough cases. Still, beneath the surface, the situation is relatively okay. For example, the number of hospital admissions has been a bit stable in the UK and the US. Also, symptoms of the Omicron variant are relatively mild compared to those of Delta and the previous variant.
Therefore, analysts believe that countries like the UK will insist on social distancing, vaccines, and mask mandates instead of full lockdowns.
In the UK, the government will likely maintain the Plan B measures it introduced early this month. Before Christmas, there were rumors that the Boris Johnson administration was considering a national lockdown to curb the spread.
There are other signs that show that the Omicron variant is not a major threat to the economy. This week, the Centers for Disease Control (CDC) shortened the isolation period for people infected with the disease from 10 days to 5.
The GBPUSD is therefore rising as investors price-in a more hawkish Bank of England (BOE) in 2022. In its December meeting, the bank surprised investors by hiking interest rates by 25 basis points. It signaled that it will increase interest rates several times in 2022.
The bank’s decision caught many investors and analysts off-guard because it came at a time when the country was reporting more cases. In justifying the rate hike, the bank cited the rising inflation rate. Recent data showed that the country’s inflation rate rose by 5.2% in November.
Therefore, the Omicron variant and the disruptions associated with it will lead to more inflation in 2022. In return, this inflation will see the BOE deliver about 3 to four rate hikes in 2022.
The GBPUSD pair also rose after the weak US housing data. On Tuesday, data showed that the closely watched Case-Shiller house price index (HPI) declined for three straight months. And on Wednesday, data showed that the countries pending home sales numbers declined by 2.2% in November.
The US and UK housing markets could start to cool down in 2022 because of the rising interest rates in the two countries.
The four-hour chart shows that the GBPUSD pair declined sharply from its highest level in October to its lowest point in December. Precisely, it crashed by about 4.90% in this period. The pair has managed to recover some of these losses this month. It has risen to the 50% Fibonacci retracement level.
The pair has also moved above the 25-day and 50-day moving averages (MA) while the Relative Strength Index (RSI) moved to the overbought level of 70. The rally accelerated when the pair moved above the key resistance at 1.3370.
Therefore, the pair will likely keep rising as bulls target the next key resistance at 1.3600, which is slightly above the 61.8% retracement level.