The GBP/USD soared to the highest level in three years as investors bank on the continuing divergence between the Federal Reserve and Bank of England (BOE). It is trading at 1.4240, which is almost 25% above the lowest level in March last year.
Fed and BOE divergence
The GBP/USD pair has jumped as the economies of the UK and the US bounce back, as evidenced by the recent economic data. From the UK, the economy rebounded by more than 2% in March, while the unemployment rate declined to 4.9% in April. Retail sales jumped at the fastest pace in years in April while the manufacturing, services, and inflation numbers also soared.
The same trend was seen in the United States, where the personal consumption expenditure (PCE) rose at the fastest pace in decades. Consumer and producer inflation also rose by 4.2% and 6.2% in April, significantly higher than the Fed’s target of 2.0%. The labor market is also tightening.
Therefore, the GBP/USD has risen because of the divergence between the Fed and the BOE. While the BOE is expected to start tightening soon, the Fed has insisted that it will wait and see. The recent minutes and statements by Fed officials show that the members believe that the country is still facing an uneven recovery. All this has put the US dollar on the defensive, with the dollar index hovering near the lowest level since last year.
The GBP/USD has also done well as the UK nears full reopening. The government plans to fully reopen the country on Monday next week. This means that companies will be allowed to do most activities while maintaining some guidelines.
These measures are being eased because the government has already vaccinated a substantial part of the population, and the number of new infections has continued to ease.
As a result, analysts expect that many businesses will continue doing well, considering that the government will maintain some of its pandemic response policies like the furlough program.
PMIs and central bank speeches
On Tuesday, the GBP/USD pair will react to the latest housing data from Nationwide. The House Price Index is expected to show that prices rose by 9.2% year-on-year in May. This will be the highest growth rate since 2014. House prices have done well in the UK because of low-interest rates and government support measures.
Markit will also publish the final reading of the UK manufacturing PMI data. Analysts expect the data to show that the PMI rose to 66.1 in May, which is a strong number.
The pair will also react to the latest manufacturing PMI data from the United States that will be published by Markit and the Institute of Supply Management (ISM). The two numbers are also expected to be strong since the manufacturing sector has generally done well.
Finally, the pair will react to statements by Andrew Bailey of the Bank of England (BOE) and Fed’s Lael Brainard and Richard Quarles.
The daily chart shows that the GBP/USD pair made a bullish breakout on Monday. It did this by moving above the previous year-to-date high of 1.4247. It has also moved above the 25-day Moving Average and the ascending trendline that connects the lowest levels since September.
Therefore, the pair will likely keep rising, with the next key resistance being at 1.4350. However, a drop below 1.4100 will invalidate this thesis.