GBP/USD Breaks Out

 | Jan 14, 2022 05:41AM ET

In terms of specific trades, the breakout in GBP/USD seems to be capturing the most attention; So whether its congratulations for catching the move, commiserations for being on the wrong side of it, or simply kicking yourself for missing it, let’s take a look at what caused the movement.h2 UK Optimism In Bloom/h2

On the GBP side of the equation, the main factor currently driving bullish sentiment is the passing of Omicron risks. With infections falling and many reports claiming the Omicron outbreak has peaked, there is a great sense of relief among GBP traders.

With the UK having avoided going back into total lockdown and many optimistic reports projecting that the pandemic might be in its final stages with Omicron, traders are looking ahead to the rest of the year.

The key focus is now once again on BOE tightening expectations, with markets looking for another hike as soon as next month should data continue to reflect strength in the economy.

The latest data released today shows that the UK economy grew to pre-pandemic levels following a 0.9% expansion in November. Given that just ahead of Christmas in the UK, there was a massive amount of trepidation regarding the likelihood of a UK lockdown in Q1, this sudden shift in narrative has created explosive moves across the GBP bloc.

h2 USD Positioning Clear Out/h2

Focusing on the US dollar then, it’s been a very different story with the greenback correcting against the broader bull trend, to trade lower across the week. The reason for the move is likely a function of the elevated bullish positioning in USD, which, on the back of a mixed jobs report last week, has started to see some recalibration.

Indeed, while inflation figures came out above forecast yet again this week (December CPI), it seems that the data was not deemed reason enough to continue buying USD here, allowing for some correction and clearing of order books.

For now, the market is still looking for a March rate hike. However, if this view shifts in the coming month, the USD correction might grow deeper. So, that is the fundamental backdrop. Let’s take a look now at the technical landscape.

h2 Technical Views - GBP/USD/h2

The rally in GBP/USD this week has seen it breaking out above the bear channel and above the resistance region around 1.3676.

This is a key technical break for the pair and, with both MACD and RSI bullish, the focus is on further upside.

While price holds above 1.3676 and the broken bear channel top, the focus is on a break of 1.38 next, targeting 1.40 above.