GBP/USD is Ripe for a Bullish Breakout as Pressure Mounts on Fed and BOE

The GBP/USD is hovering near the highest level since April 2018 as investors focus on the strong recovery of the UK economy. It is trading at 1.4180, which is slightly below the year-to-date high of 1.4240.

Strong UK economy

The GBP/USD has been on strong upward momentum in the past few months as investors have focused on the strong UK economic recovery. The pair has jumped by more than 25% from the lowest level in 2020. 

There are several reasons why the sterling has outperformed other developed country economies lately. First, the economy has done well because of the Brexit deal that the UK and the European Union reached in December. This deal helped to ensure that trade between the two parties continued to flow unimpeded. Before the deal, analysts were expecting a significant hit to the UK economy.

Second, the UK was the first country to start Covid vaccinations. Recently, the country has made significant progress on this. It has already vaccinated millions of people. Indeed, it is the second after Israel to vaccinate a significant portion of its population. This has helped the country reduce the total number of infections. Also, it has helped it accelerate its recovery process. 

Indeed, in a report on Monday, Cineworld hailed the strong demand for movie tickets during the weekend. The firm has also seen strong demand for future tickets. Other companies in the services sector like restaurants and hotels have also seen robust demand, as evidenced by the strong flash services PMI number published on Friday. The PMI jumped to 61.8, the highest level since 1992.

Third, the GBP/USD has done well because of government support. In response to the pandemic, the Boris Johnson administration has launched the biggest stimulus package in the country’s history. It has done this by several actions, including the furlough program that has helped keep the unemployment rate low. Data published last week revealed that the unemployment rate declined to 4.8% in March. This was better reading than in most countries like the US and France.

Other reasons why the pair has jumped are the recent Scotland parliamentary elections and the strong performance of the retail sector.

Pressure on the Fed and BOE

Meanwhile, the GBP/USD has also rallied because of the weaker US dollar. The dollar index is trading at $89.4, which is more than 12% below the highest point last year. The currency has dropped against all majors like the euro, Swiss franc, and Japanese yen. This is mostly because the Fed has remained dovish even as the economy continues to rebound.

In all, there is ongoing pressure on the Bank of England (BOE) and the Federal Reserve. The BOE has taken the first steps towards tightening. Indeed, many analysts believe that the bank will start tapering its asset purchases in the June meeting to prevent the economy from overheating. The Fed, on the other hand, has remained dovish even as data shows that the US economy is on a quick recovery. 

GBP/USD forecast

The GBP/USD has been on a strong upward trend. On the daily chart, it is struggling to move above the highest level this year. It has also formed a cup and handle pattern that is usually a sign of bullish continuation. It is also above the short and long-term moving averages. The Relative Strength Index (RSI) is also close to the overbought level. Therefore, in the near term, a bullish breakout cannot be ruled out.