The pound is among the best performers on Tuesday, trading around the 1.39 mark, up 0.5% on the day. The GBPUSD is extending its recovery from three-week lows hit on Friday below 1.38. The price made fresh daily highs at 1.3924 and now appears to be looking for further gains, targeting the 20-DMA around the 1.40 threshold.
Following the last weeks’ depreciation, the British currency looks attractive for longs again. The latest trigger for GBP's stronger performance was the UK CPI report. Inflation remained at 3.0% in January, close to the six-year high and unchanged from the previous month against the expected fall to 2.9%. The strong figures have fueled expectations of rate hike in May. Now the market is pricing a 70% chance of this scenario.
But at this stage we wouldn’t take the May hike for granted as the Central bank needs confirmation from other economic indicators that the UK economy will smoothly withstand a more aggressive monetary policy tightening, especially on the back of risks associated with Brexit. In the short-term, the pound looks bullish, but in needs to confirm the break above the 1.39 level in order to preserve the upside bias.
By Helen Rush
Senior Analyst at Capital Markets