Pound drifting at 1.35 level

Pound hits 7-week high

The British pound is trading quietly in the European session, at 1.3515. The pound is up 0.90% this week, after a strong gain of 1.18% a week earlier. On Thursday, GBP/USD rose to 1.3520, its highest level since November 10^th. Will the pound push above this line on the last day of 2021?

The catalyst driving the pound’s rally impressive rally over the past two weeks has been elevated risk sentiment, which has resulted in movement away from the safe-haven US dollar. Investor mood has remained positive despite the screaming headlines of the explosion in the number of Omicron cases, including an all-time daily record of cases in the US this week. Not only has the Omicron surge failed to put a dent in investor confidence, but Wall Street recorded some record highs last week. Investors are basing their optimism on medical data which indicates that Omicron is much less severe than previous Covid variants, even though it is much more contagious.

On Thursday, US chief medical advisor Anthony Fauci said that we could see a peak in Omicron cases in the US in late January. This means that Omicron isn’t going away anytime soon, and there will be a huge number of people in infected with Covid in the coming weeks. The critical question for the markets is how sick are those people who are infected with Omicron – if we don’t see a huge spike in hospitalisations and new crippling health restrictions, then market sentiment should not be weighed down by Omicron.

Over in the US, the Federal Reserve has taken a hawkish pivot in recent weeks after it was forced to abandon its view that inflation was transitory. The Fed recently doubled the taper of its bond purchase programme, which is now scheduled to end in the spring rather than mid-2022. Fed policymakers are expected to raise interest rates shortly after the bond purchases end, with the market pricing in three rate hikes in 2022.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3349 and 1.3261
• There is resistance at 1.3462 and 1.3550

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