Scope for More GBP/USD Upside Near-term says Analyst

Above: GBP/USD chart courtesy of The Technical Trader. 

The British Pound could be on course to register further gains following a strong turnaround over recent hours, according to analysts.

The Pound fell to lows below 1.19 on Friday before jumping back above the key $1.20 level following the release of some surprising U.S. data that suggested growth in the world's largest economy was starting to slow notably.

"The U.S. dollar started the week on the back foot, losing ground to other major currencies and approaching December’s lows. Investors have started pricing in a less aggressive stance from the Federal Reserve, following the release of jobs numbers on Friday that showed that, albeit unhurriedly, the US economy is starting to slow down," says Ricardo Evangelista, Senior Analyst at ActivTrades.

The Pound to Dollar exchange rate (GBP/USD) fell to 1.1840 on Friday before rallying and closing the day at 1.2090 as it hitched a ride in a broader global equity market rally.

Ongoing positive investor sentiment means the pair was able to extend the advance to 1.2188 on January 09 and further advances over the coming days could depend on whether the supportive background mood music persists.

"Sentiment shifted significantly on Friday following the release of the US jobs data and the UK currency rebounded with a gain of 1%. The net result is that it ended the foreshortened week with a fractional loss, and Friday’s price action implies that there might be scope for further upside," says Bill McNamara, analyst and founder of The Technical Trader.

U.S. labour market statistics showed a continued trend of ever-smaller increases in the number of jobs being created by the economy while a noticeable slowdown in hourly earnings growth was also registered.

"Against this background, the consensus is that when the Fed next meets in February it will decide on a 25 basis points rate hike, rather than the 50 or 75 bp delivered at each of the last six meetings," says Evangelista.

Therefore, a counterintuitive situation exists where bad news on the economy is good news for markets.

"This is scenario that is bearish for the US dollar, especially considering the improvement in risk appetite, following the reopening of China, which has also dimmed the greenback’s haven appeal," he adds.

McNamara says that for GBP/USD, "a close above 1.21 would look short-term bullish and would clear the way for a run back up to around 1.225".

"If that is exceeded for any reason, the next target would then be the recent intermediate high, at 1.242," he adds.