GBPUSD Technical Analysis:

Cable reached the 1.3150 – 1.33 big support area that we discussed last Monday. As can be seen from the weekly chart below, it is indeed a zone where GBPUSD has reversed multiple times over the past years. Moreover, the 100-week and 200-week moving averages are located in the same area.

Given the significant support barrier very near to current levels (in the context of the weekly chart), short positions do not look attractive as long as GBPUSD is above this 3150 – 1.33 support. However, a bearish breakout below the 1.3150 could lead to a significant sell-off, at least based on the technicals. There are no big support zones below 1.3150, except for the 1.30 psychological zone, but it’s questionable how much it could hold off such a sell-off on its own without additional technical indicators lining up near it. Thus, the next big support below 1.3150 is way down at the 1.25 – 1.26 area, which is the 61.8% Fibonacci retracement (from March 2020 low to May 2021 high).

GBPUSD resistance zones up from current levels are located at 1.34 and 1.35 ahead of the more important one around 1.36.

US Dollar Fundamental Outlook: Fed’s Hawkish Shift Intact - Powell Says Time To Retire “Transitory”

The big news last week was Fed chair Powell’s testimony before the Senate, where he officialized the Fed’s hawkish shift by saying that it is time to retire the word “transitory” when describing inflation. The dollar surged as he was saying the words (EURUSD down 120+ pips, USDJPY up 90+ pips), although these gains retraced in the following days as traders are still coming to terms with the appearance of Omicron.

In addition to the new uncertainties around the virus, some US data last week disappointed (Nonfarm Payrolls, consumer confidence) and there are more pivotal events this and next week scheduled (Fed meeting December 15). So, between all those uncertainties, it’s natural that traders don’t want to take new positions. Hence, the dollar consolidation seems likely to continue in the following days and into the all-important Fed meeting next Wednesday.

Nonetheless, the message from Powell was clear and reasserted the Fed’s seriousness in fighting inflation. Several FOMC members have already said they think the Fed should end QE sooner and probably start raising rates by mid-2022. This is much more hawkish relative to other major central banks, and this theme should eventually support the dollar in the period ahead (think into and during Q1 2022). And while Nonfarm Payrolls missed expectations, the unemployment rate fell substantially, making the overall takeaway from the jobs reports a neutral one. There was nothing in the data to discourage the Fed from proceeding with faster QE tapering next month.

It is a relatively light US calendar until Friday when the latest CPI inflation data will be released. Another hot report is expected by economists (y/y headline 6.7% and core 4.9%), with potential for upside surprises. Based on the actual CPI release, the USD could extend the uptrend (CPI beat) or extend the consolidation (on a CPI miss).

British Pound Fundamental Outlook: BOE Rate Hike Bets Are Having a Wild Ride Again (and so Does GBP)

GBP had some rollercoaster moves during the week, though it generally closed lower on Friday. Perhaps the biggest negative was the speech Friday afternoon from BOE hawk Michael Saunders who said that the uncertainties around the Omicron variant might make him vote for no rate hike at the next meeting (December 16). This was a big surprise for the markets because Saunders was one of the only two MPC members who voted for a hike in November (7-2 vote to keep rates steady).

Could the Bank of England deliver another disappointment to GBP bulls? If so, the selling can certainly extend as we already saw last week on Saunders comments. The risk-off sentiment also prevailed for another week, which is not the best environment for sterling either. While not as sensitive to risk sentiment as other currencies, GBP still tends to weaken in periods of risk-aversion. So, this factor is no longer a tailwind for the pound.

The UK calendar is also light, with perhaps Friday only more interesting around the GDP release. Overall, GBP looks set to remain in broader ranges this week as traders gear up for the Bank of England meeting next Thursday.