Pound / Dollar Week Ahead Forecast: Supported Above 1.33 and Eyeing 1.36

• GBP/USD's holiday rally puts 1.36 in crosshairs
• Supported at 1.3450, 1.3402, 1.3357 & 1.3311
• Facing resistance at 1.3540, 1.3560 & 1.3580
• U.S. data in focus inc ISM PMIs & Dec payrolls

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The Pound to Dollar rate entered the new year near two month highs following a festive rally that has brought the 1.36 handle into view for Sterling, and which could see the British currency well supported above 1.33 this week.

Sterling was the best performing major currency of the G10 contingent during the final week of 2021 and took third place for the year overall after being eclipsed by only the U.S. and Canadian Dollars, which took first and second place respectively.

While the Pound-Dollar rate ended the year more than one percent lower for the period, it rallied strongly from 1.32 ahead of the festive holidays to enter the new year trading above 1.35 in a turn of events that could indicate that its six-month corrective downtrend is coming to an end.

“The GBP may be in a brief consolidation period prior to its bullish trend toward 1.36 resuming. Ahead of the figure, the 100-day MA at 1.3566 stands as resistance. Support is ~1.3480 followed by the mid-figure area,” says Juan Manuel Herrera, an FX strategist at Scotiabank.

The Pound-Dollar rate had previously tested a major level of technical support at 1.3163 in mid-December before last month’s interest rate rise from the Bank of England prompted a recovery that has cultivated the appearance of a bottom forming on the charts.

Above: Pound-Dollar rate shown at 4-hour intervals with Fibonacci retracements of December rally indicating possible areas of technical support.

• GBP/USD reference rates at publication:
  Spot: 1.3475
• High street bank rates (indicative band): 1.3103-1.3198
• Payment specialist rates (indicative band): 1.3381-1.3410
• Find out about specialist rates and service, here
• Set up an exchange rate alert, here

“The early start to the BoE’s hiking cycle and the three to four 25bps increases expected next year should keep the GBP supported over the next few months to outperform most of its peers. However, with markets already fully pricing in the maximum amount of tightening possible by the BoE, GBP upside will remain limited and we think it’s highly unlikely that the GBP regains the 1.40 mark,” Scotiabank’s Herrera said on Friday.

Meanwhile, Sterling advanced through the holidays after multiple studies suggested the Omicron variant of coronavirus could be milder than its relatives, easing concerns about its economic impact and prompting investors to anticipate another rate rise from the BoE coming as soon as February.

For its part the U.S. Dollar has eased from mid-December highs against many currencies in the absence of a speculative bid throughout the holidays, which leaves much about this week’s price action in the Pound-Dollar rate to be determined by whether that bid returns.

This week’s action-packed U.S. economic calendar could have a say on whether it does and includes Institute for Supply Management PMI surveys of the manufacturing and services sectors, minutes of December’s Federal Reserve (Fed) meeting and last month’s non-farm payrolls report.

“Chair Powell’s hawkish tone at the press-conference suggested that he might conclude that the maximum employment requirement for liftoff has been met even earlier than previously expected. We continue to expect three rate hikes in 2022, and that balance sheet runoff will begin in 2022Q4,” says David Mericle, chief U.S. economist at Goldman Sachs, in a Sunday note.

Friday’s payrolls report could be particularly important for how the Pound-Dollar rate fairs in the opening week of January because a strong year-end for the labour market might encourage the market to more confidently anticipate an initial interest rate rise from the Federal Reserve coming as soon as March or April, a prospect that is yet to be fully priced-in by interest rate markets.

Above: Pound-Dollar rate shown at daily intervals with Fibonacci retracements of September correction lower indicating some likely areas of technical resistance to a further recovery.

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“A potential growth threat to the US economic recovery over the winter months could be the return of the Covid pandemic which could delay the full re-opening of the all-important services sector and thus delay a more meaningful normalisation of the Fed policy until Q222. Moreover, we note that the USD is looking quite overbought and overvalued, according to our in-house gauges,” warns Valentin Marinov, head of FX strategy at Credit Agricole CIB.

Almost the entirety of the Pound-Dollar rate’s six-month decline was driven by growth in the market’s appetite for the Dollar rather than a prejudice against Sterling.

The Dollar rose against most other major currencies last year but proved unable to hold off a U.S. counterpart that was rejuvenated in the latter half by the Fed gradual preparation of the market for a now in-progress withdrawal of its crisis-inspired monetary policy support.

“Although three Fed rate hikes have been priced in for this year, we anticipate further gains in the US dollar as the terminal Fed Funds rate path still has a lot of room to climb. The US OIS 2YX2Y forward rate, for example, is still under 1.4%,” says Alvin Tan, chief Asia FX strategist at RBC Capital Markets.

The Fed accelerated the winding down of its $120BN quantitative easing programme in December so that the process ends in March and its updated economic forecasts warned that interest rates could rise on as many as three occasions next year, which would take the top end of the Fed Funds rate range back to 1%.

Although, despite this, the Dollar has eased off against many currencies.

Price action in the opening week of January will offer insight into whether the rally in the greenback can extend further and will likely see Sterling reflecting the broader mood and trends in global markets given that the UK economic calendar sits devoid of meaningful appointments.

Above: Pound-Dollar rate shown at weekly intervals with major moving-averages and Fibonacci retracements of 2020 recovery indicating likely areas of technical support for Sterling.