GBP/USD chops either side of 1.3200, takes a breather ahead of key UK GDP and US inflation data

• GBP/USD has spent the majority of Thursday’s session chopping either side of the 1.3200 handle.
• The 38.2% Fibonnacci retracement back from the post-pandemic high to the post-pandemic low is offering some.
• A break below this support would open the door to a swift move to the psychologically important 1.3000 level.

GBP/USD has spent the majority of Thursday’s session chopping either side of the 1.3200 handle and currently trades with losses of slightly more than 0.1% on the session around the 1.3190 mark. The pair is holding up rather well in light of the downside being seen in risk assets (stocks and oil), risk-sensitive currencies (NZD, AUD and CAD) and its European peers (EUR and CHF) that would normally also weaken sterling. For reference, all of these currencies are between 0.3-0.7% lower on the day versus the buck.

One reason for sterling’s resilience could be technical; the 38.2% Fibonacci retracement back from the post-pandemic high at 1.4250 to the post-pandemic low at just above 1.1400 is offering the pair some support in the 1.3170 area. Meanwhile, according to the 14-day Relative Strength Index, GBP/USD is fast approaching oversold territory and currently sits just above the 30.00 (below which an asset is viewed as oversold).

As positioning becomes stretched - GBP/USD has lost over 3.5% since the start of last month versus EUR/USD’s 2.3% - some profit-taking on shorts makes sense, especially given that key UK and US data looms on Friday. At 0700GMT, UK October GDP and activity data is out, while at 1330GMT, US November Consumer Price Inflation data will be released. Both will be closely scrutinised by central bankers ahead of next week’s Fed and BoE meetings. Caution ahead of these key events is another reason for GBP/USD selling pressure to ease – for now.

One factor weighing on sterling in recent weeks has been markets revising lower their expectations for the BoE to hike rates next week due to Omicron uncertainty, whilst Fed tightening expectations have remained largely intact (with this week’s strong US labour market data helping). According to Refinitiv data cited by Reuters earlier in the session on Thursday, the implied probability of a 15bps rate hike from the BoE next week had dropped to 40% versus 46% on Wednesday and nearly 70% at the start of last week.

Technically speaking, things aren't looking great for GBP/USD unless the pair can break above a recent downtrend that has been capping the price action going all the way back to the end of October. If for whatever reason (surprise BoE hike or dovish Fed…?) it was able to do that, then a move back to test resistance in the 1.3400 area could be on the cards. But if the pair does break below support in the mid-1.3100s, a swift move to the psychologically important 1.3000 level would be on the cards.