GBP/USD Daily Forecast – Sterling Holds Steady Above 100-DMA Following UK GDP

The UK economy didn’t show growth in the fourth quarter when compared to the prior quarter and grew 1.1% when compared to the same quarter a year earlier.

The subdued performance in the UK economy was somewhat expected as Brexit uncertainty weighed ahead of the December election. As such, the report is not likely to carry much weight in the Bank of England’s ongoing assessment of monetary policy changes.

Further, UK GDP has been volatile over the past year as ongoing changes in Brexit deadlines have led to unusual spending patterns. Post-election data will tend to provide a more accurate forward-looking view of the British economy.

In the session ahead, Fed Chair Powell will testify to Congress. In prior communication, the Fed revealed intentions to keep monetary policy on hold. If Powell deviates from this stance, the markets are likely to react appropriately.

Bank of England Governor Carney is also expected to testify. He may provide his views on today’s GDP report, or more importantly, an update in the BoE’s stance toward a possible rate cut.

Technical Analysis

Last week, GBP/USD broke below an important support level at 1.2960 to set a bearish tone. However, the short-term technical outlook shifted at the start of this week as the 100-day moving average has elicited buying.

The upside level at 1.2960 is now considered to be resistance and will be an important level in the week ahead. While below it, the broader bearish view remains intact. If the pair manages to scale above it, on a sustained basis, it would signal that a broader recovery might be taking place.

Sterling is showing some underlying strength as the trade-weighted US dollar index (DXY) posted a sixth straight day of gains on Monday while GBP/USD managed to eke out a gain.

Over the near-term, the pair has posted a bullish engulfing candle on a 4-hour chart as a result of early day price action. The candlestick pattern signals potential for more upside while the pair holds above 1.2900 support.

Bottom Line

• GDP growth was flat in the fourth quarter which was largely expected considering the UK election.
• GBP/USD continues to show signs of a recovery attempt in the early week as the 100-DMA provides downside support.