The British pound currency has had a bad start to the week against the US dollar as the COVID-19 first omicron-linked death hurt market sentiment and prompted UK equity markets to fall.
Sterling is back to the 1.3200 mark and close to breaking down under its yearly low. A continuation of market fears is likely to see the GBPUSD pair trading towards the 1.3000 level into year-end.
As traders and investors factor in rising infections and the first death linked to the omicron variant in the UK, we are probably going to see more sterling weakness as the British pound is closely linked to stocks.
Boris Johnson, the British PM, raised the COVID alert to four, raising the specter of further lockdown which could harm the economic outlook for the UK economy if it comes to pass.
We should also consider the Federal Reserve and Bank of England’s last monetary policy meetings in the year this week. Without a rate hike from the BoE, sterling is probably looking lower.
On Friday BoE member Michael Saunders said that a key consideration for him at the December policy meeting will be the possible economic effects of the new Omicron variant.
Saunders said, “It is likely that any rise in bank rate will be limited given that the neutral level of interest rates remains low.” And “Provided we do not delay too long; it should be a case of easing off the accelerator rather than applying the brakes.”
This would hint that the BoE could still hike rates this year, but 50 percent of economists think that the BoE will not. I think the chances are fairly low as the BoE probably need to time to decide.
Looking at sentiment, the ActivTrader Market Sentiment tool shows that traders are currently still positive towards sterling, despite the massive pullback from the October highs and COVID-19 fears.
The current reading shows that sentiment is at 63 percent and has dropped slightly since last week, however, this bullish sentiment skew could mean that GBPUSD pair is due for more losses this week, so buying sterling is still very risky.
GBPUSD Short-term Technical Analysis
Looking at the four-hour time frame, technical analysis shows few reasons to be bullish towards sterling as the pair trades below key Ichimoku cloud resistance.
Traders should note that bulls need to defend the 1.3200 level this week to avoid a big drop towards the 1.3000 level. Failure to crack the 1.3200 level could see the 1.3500 level tested.
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GBPUSD Medium-term Technical Analysis
According to the daily time frame, the GBPUSD pair has formed a large head and shoulders pattern, which is still approaching its downside target.
The GBPUSD pair is also capped below cloud resistance on the Ichimoku indicator and looking lower towards the 1.3000 level. The 1.3280, and 1.3500 level remains the strongest resistance points.
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