Pound edges higher on Johnson Covid remarks

The British pound has posted slight gains on Wednesday. GBP/USD rose to 1.3557 on Tuesday, marking a 7-week high.

Johnson says no to further restrictions

The British pound ended 2021 on a strong note, gaining more than 2% in the last two weeks of the year. Higher risk sentiment led to a rotation out of US dollars and the risk-sensitive pound made strong inroads against the safe-haven US dollar. This week has seen US treasury yields rise, also a result of confidence in the markets. This has given the US dollar some strength, although the pound is holding its own after positive comments from UK Prime Minister Boris Johnson that the government plans to ‘ride out’ the Omicron wave without further restrictions.

The UK has recorded more than 200 thousand news cases of Omicron on Tuesday, but Johnson has argued that Omicron is less severe than previous variants, and with the rollout of booster vaccines, the country could keep schools and businesses open and live alongside Omicron. The markets are watching with fingers crossed, hoping that Johnson’s stance will prove successful in the face of skyrocketing Omicron cases.

Fed to double taper, raise rates 

The Federal Reserve is poised to shift in a hawkish direction, after finally admitting that high inflation is not going away anytime soon. The Fed plans to double the tapering of its USD 120 billion bond purchase programme from 15 billion dollars to 30 billion dollars at the January meeting. This will be followed by a rate hike lift-off, perhaps as early as March. Higher rates have become imperative due to red-hot inflation, which is currently running at a clip of 6.8%, its highest level in 40 years. The Fed dot plot at the December meeting indicated that policymakers plan on two rate hikes of 0.25% in 2022, but the markets, which are more hawkish, have priced in three rate hikes. With the US economy performing well, both the Fed and the markets are confident that the economy is resilient enough to withstand a series of rate hikes in 2022.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3426 and 1.3329
• There is resistance at 1.3585. Above, there is resistance at 1.3647

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