The GBP/USD pair is currently trading at 1.3513, and is holding its own in the new year. The 52-week trading range of the cable is 1.1995 on the low end and the 52-week high is 1.3616. Sterling is up since September 2017, when it briefly dipped below the critical 1.30 level to the greenback. Presently, the cable is trading above the 50-day moving average of 1.334, and the 200-day moving average is 1.306.
Rising bullish sentiment is likely to be a short-term phenomenon for sterling. Wilkins Finance analysts caution that traders should hedge their positions on sterling, given many peripheral concerns in the UK. ‘We are seeing net call options on sterling at present, but this can easily shift with the release of macroeconomic data results.’
Factors Currently Influencing the Forex Markets
The forex markets are currently influenced by interest rates such as the Federal Funds Rate (FFR), and the Bank of England (BoE) bank rates. The cable has been trending slightly bearish heading into the second week of January. The support level appears to be the 1.35 level, but if the cable breaks below this critical level, the next support level will be around the 1.33 level. However, there is increasing volatility with the USD given several upcoming economic announcements.
Here are some of the most important economic factors influencing the GBP/USD pair:
- UK Inflation Rate Year on Year for December on Tuesday 16 January 2018
- UK Claimant Count Change for December on Wednesday 24 January 2018
- UK Unemployment Rate for November on Wednesday 24 January 2018
- UK GDP Growth Rate for Q4 on Friday 26 January 2018
From the US perspective, the following upcoming economic announcements must be factored into the equation:
- US Core Inflation Rate and Core Inflation Rate Year on Year on Friday 12 January 2018
- US Michigan Consumer Sentiment Preliminary Report for January on Friday 19 January 2018
- US Existing Home Sales Report on Wednesday 24 January 2018
- US New Home Sales on Thursday 25 January 2018
Currently, the US Dollar Index (DXY), a broad measure of the US dollar against a basket of 6 currencies, is trading at 92.30. The 52-week low of the DXY is 91.01, and the 52-week high is 102.95. For GBP/USD currency traders, this is an important barometer of FX trading activity. Over the past 1 month, the DXY is down 1.21%, and down 0.77% since October 2016.
However, USD strengthening has been taking place in 2018, to the tune of 0.19% for the year to date. Over the course of 1 year, it is clear that the GBP has gained the ascendancy over the greenback. -9.27% losses have accrued with the USD against 6 currencies including CAD, GBP, EUR, JPY, SEK, and CHF since January 9, 2017. While sterling comprises just 11.9% of the DXY, the overall trend is a good barometer of which way to trade the cable.
Analysts Slightly Bullish on under-Valued GBP
The British pound is widely regarded as an undervalued currency. This is evident across the board. At the time of the Brexit referendum in June 2016, the GBP/USD pair was trading around 1.47. Today, UK clients get $0.12 less for every £1 than two years ago. However, to break through critical levels, the GBP/USD pair must breach the 1.3650 level. If it can sustain such activity, a widespread move towards increased bullishness could result. Nobody is urging clients to go all in on GBP just yet.
Brexit-related concerns remain at the forefront economic concerns. Capital flight from the UK is a real concern. This is particularly true in the banking and financial sector which has traditionally favoured the London metropolis over other European capitals. There is lots of talk about the UK shifting its attention to Canada, the US and Asia, over Europe for its trade deals. Whether this strategy will bear fruit remains to be seen.