GBP/USD tide turning after 6-month retreatWith year-end rally prompting retest of 1.35Brings 1.3572 & 1.3625 into view on horizonAfter GBP lifted by BoE rate bets & USD stalls

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The Pound to Dollar rate reached one month highs of 1.35 during the final week of 2021 in another sign of it attempting to draw a line under a six-month corrective decline, although much about the outlook is hinged on market appetite for the greenback once into the new year.

Sterling had reversed almost half of its final quarter loss when the Pound-Dollar rate was quoted briefly at 1.35 in the penultimate trading session of 2021 on Thursday, although it remained a long way below September’s 1.39 opening level and even further off June’s 2021 high near 1.4250.

The Pound-Dollar rate has rallied sharply from mid-December’s year-to-date lows at 1.3162 during the festive holiday, overcoming a hat-trick of technical resistance barriers on the charts along the way before retesting the 1.35 handle on both Wednesday and Thursday.

“News of the massive US trade deficit whacked the US Dollar on Wednesday, though we’re already seeing the Buck quickly find renewed demand into the dip. The reason? Well…we think a lot of this has to do with Fed rate hike pricing,” says Joel Kruger, chief FX strategist at LMAX Exchange Group.

“A move back above 1.3514 would take pressure off the downside,” Kruger said on Thursday, in reference to the Pound-Dollar rate.

Above: Pound-Dollar rate shown at daily intervals with Fibonacci retracements of September correction and major moving-averages indicating likely areas of technical resistance to Sterling’s recovery.

GBP/USD reference rates at publication:

Spot: 1.3457High street bank rates (indicative band): 1.3085-1.3180Payment specialist rates (indicative band): 1.33362-1.3389Find out about specialist rates, hereSet up an exchange rate alert, hereA softening greenback may have aided the Pound-Dollar rate’s gains on Wednesday but Sterling had been rallying of its own accord for much of the fortnight since the Bank of England (BoE) surprised the market on December 16 by lifting Bank Rate from 0.1% to 0.25%.

“Instead, traders can focus on the fact that the Bank of England decided to raise rates in the face of rising Omicron cases, with a strong chance that the UK will find itself with better herd immunity and an improving economic outlook by the February BoE meeting,” says Joshua Mahony, a senior market analysts at online trading firm IG, in a Wednesday market commentary.

December’s Pound-Dollar rally was given new life ahead of the festive break when studies from England, Scotland, and South Africa suggested the risk of hospitalisation could be between 15% and 80% lower with the omicron strain of coronavirus than it was with the delta variant.

“A firmer breach of the 50-day MA at 1.3429 (on a closing basis, as well) would signal regained upward momentum toward a test of 1.36, with the 100-day MA (today at 1.3572) acting as the next key resistance marker following the 1.35 figure,” says Juan Manuel Herrrera, a strategist at Scotiabank, referring to the Pound-Dollar rate in a Wednesday market commentary.

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Coronavirus studies and December’s rate rise from the BoE have seen financial markets revise up their expectations for Bank Rate next year, with overnight-indexed-swap pricing coming to imply a high probability of the benchmark rising to 1.25% by the end of 2022.

However, much about the Pound-Dollar rate’s performance in the new year will be determined by market appetite for the U.S. Dollar, which became the best performing major currency in the G10 contingent for 2021 after the Federal Reserve (Fed) hinted in June that it could begin winding down its quantitative easing programme before year-end and ultimately look to raise U.S. interest rates much sooner than previously thought likely.

“The year 2022 looks likely to deliver more volatility than 2021 delivered as the market adjusts to a tightening Fed and as the Fed possibly adjusts to a market unable to make that adjustment gracefully,” says John Hardy, head of FX strategy at Saxo Bank, who’s a seller of the Pound-Dollar rate.

“If the more hawkish Fed ends up triggering a seize-up in financial markets, the US dollar will tend to outperform sterling as a safe-haven. The trade is limited to the first quarter because for the balance of 2022 we are looking for the US dollar to turn lower,” Hardy said on Thursday.

Above: Pound-Dollar rate shown at weekly intervals with Fibonacci retracements of 2020 recovery indicating likely areas of technical support for Sterling, shown alongside U.S. Dollar Index.