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GBP/USD Holds Above 1.40 As UK Prepares For Lockdown Easing

The pound remains on the front foot ahead of Boris Johnson’s highly-anticipated speech to unveil ‘cautious’ plan to lift England’s lockdown. Much of the details have already been leaked ahead of a news conference at 19:00 GMT. So, the announcement itself is unlikely to offer any fresh impetus for the pound, unless there are some surprises in store.

The pound has been surging higher on expectations of strong demand once lockdowns end. Such has been the strength of the rally that not even a badly disappointed UK retail sales report could knock the GBP/USD off its perch. This is because the markets are always forward-looking and in the case of the pound any softness in data during this lockdown continue to be shrugged off. The vaccine rollout in the UK has been quite successful so far, raising hopes that lockdowns will end for good soon, which, together with ongoing government support and favourable monetary conditions, will fuel a sharp economic recovery. And although the Bank of England has floated the idea of negative interest rates, it will unlikely go down this route given the potential for a sharp economic recovery that is likely to boost inflation towards the Bank’s 2% target. Let’s not forget that the UK also avoided a no-deal Brexit at the back end of last year, which is one of the key reasons the cable got to $1.40, a level where it was trading around before that 2016 referendum.

With the cable testing the top of its bullish channel, a bit of profit-taking is warranted at these levels. However, I reckon the pound is likely to go further higher over time – possibly towards the $1.50s in a few months’ time, although this will depend to a great extent on how the UK economy will evolve and is subject to the virus situation. What the bulls want to see next is a few days’ of consolidation to allow momentum indicators to work off their overbought conditions, before powering to new highs to the year. Short-term support is seen around 1.4000, followed by 1.3950 and then 1.3900.

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