GBP/USD, capped at 1.3730, retreats below 1.3700

• Pound's rally hits resistance at 1.3730 and pulls back below 1.3700.
• The sterling remains positive against a weaker US dollar.
• GBP/USD biased higher while above 1.3595.

The British pound is giving away gains on Thursday’s US trading session, with the pair dropping back to levels below 1.3700 after having peaked at a three-week high at 1.3730. On daily charts, however, cable remains positive, above the top of the recent trading range, at 1.3650/70.

The pound remains supported by hawkish BoE

The sterling has been showing strength over the last two weeks, as the market is pricing an interest rate hike by the Bank of England early next year. With inflation accelerating at levels almost twice the Bank’s target for price stability, BoE officials are starting to openly suggest the possibility of accelerating the monetary policy normalization plan.

Beyond that, the recent European Union's proposal to slash custom checks on British Products to Northern Ireland has eased concerns about another UK-EU dispute on the NI border, which has provided a fresh impulse to the sterling.

On the other end, the US dollar is trading softer amid a higher appetite for risk on Thursday. The decline in US weekly jobless claims, which have dropped below the 300,000 new claims for the first time in the last 19 months, has been overlooked by the market as it was the confirmation on Wednesday the Federal Reserve is set to start rolling back its bonds purchasing program over the next month, suggested by the minutes of the last FOMC meeting, released on Wednesday.

GBP/USD biased higher while above 1.3595 – UOB

From a broader perspective, the FX analysis team at UOB remains positive on the pound, as long as the pair remains above 1.3595: “We have expected GBP to trade within a 1.3500/1.3680 range since early this week (see annotations in the chart below).GBP rose strongly yesterday and the advance has gathered momentum. From here, GBP is likely to head higher to 1.3715. A break of 1.3715 would shift the focus to 1.3750. Only a break of the ‘strong support’ (currently at 1.3595) would indicate that GBP is not ready to head higher.”

Technical levels to watch