December 24, 2021 8:54:11

Sterling has been enjoying life in the build up to the holiday period and is vying with AUD as the leading G10 currency this week. There is some relief that risks around the new Omicron variant are now more manageable and won’t lead to severe restrictions, even allowing for record infections. Potential political turmoil hasn’t weighed on GBP either.

After the surprise rate rise by the BoE, money markets have also been piling on bets of more increases over the next year. Rates are expected to climb to 1.25% with four 25bp moves spread broadly across the year. Sterling was quite oversold before the MPC meeting and the overstretched short side may be offering some support as traders cover their offside positions.

GBP/USD picks up off the lows

We wrote at the start of last week how a base may be building in cable. The three-day bullish streak has now lifted it above 1.34 to its strongest level in a month. Monday had seen the pair move below 1.32. But the 38.2% Fib level retracement from 2020 at 1.3165 has capped the downside once again.

A close above the September low at 1.3411 is important for more upside. So too above the 50-day SMA at 1.3448 which would be the first time since late October. The dollar traditionally struggles to find a bid at this time of the year. It also seems that markets are already fully pricing in the feasible maximum number of BoE hikes for next year.