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Jan 25, 2022, 10:42 AM

GBP/USD Suffers Another Manic Monday

By Carl Paraskevas - Chief Economist

So far every single Monday in 2022 has spelt trouble for GBP/USD.

This Monday was no exception with the pair closing nearly half a percentage lower on the day as rising geopolitical tensions related to the Ukraine put severe strain on risk assets globally. Weaker-than-expected flash UK January PMI survey results didn't lend much support to the pound. Nor has the scandal around Boris Johnson's premiership or post-Brexit tensions between the UK and EU over Northern Ireland.

GBP/USD after a brief dalliance below, is now primed to retest the 1.34710 -1.34528 resistance now turned support established weeks prior. The latest price action represents a dramatic U-turn in the pounds fortunes from the end of last year. Propelled by a surprise 15 bps hike by the Bank of England (BoE), the first since the pandemic struck, and expectations of more in 2022, GBP/USD rose to a high of 1.37373 on 13 January 2022.

Economists are still expecting another 25 bps hike when the Bank of England's Monetary Policy Committee meets on 3 February 2022. Likewise, as at the time of writing, futures market were pricing a 87% chance of such an event. Indeed, inflation, as measured by the Consumer Price Index (CPI) accelerated to 5.4% y/y in December - its highest level since March of 1992 - and well above the BoE's 2% target.

UK CPI Accelerated Sharply in December

What looks less credible is whether the BoE presses ahead with further interest rate hikes past February. Interest rate curves pricing in two 25 bps hikes in 2022 and a probability of potentially 4 was one of the key catalysts for the British pounds assent versus the US dollar at the backend of last year. More to come on what to expect from the BoE as we get closer to the event.

For the moment, however, GBP/USD looks to be in a tenuous place. Technically, the pair is hugging the 200 Exponential Moving Average (EMA) both on the daily and 4-hour chart, which doesn't help in setting up a clear sense of direction. From a market structure perspective, however, the pair never rose enough to invalidate the downward trend established in the market in late September.

More Downside to Come?

A more convincing break above the 20 January high of 1.36660 is need to really shift sentiment. For long positions to come back in a big way a sustained break above the 13 January high of 1.37489 is key. Until then, in terms of downside, keep an eye on 1.34174 the 38.2% retracement level (from October 2021 high and December 2021 low) and 1.33648 region which was a pervious resistance level and pivot point for price.

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