Dollar rally
The dollar rally has run out of momentum and the large movement we have seen in Pound, Euro, Aussie seems to be over for now. There is a short squeeze going on in the Euro pairs and the single currency seem to be resilient to further down turn. The uncertainty about the timing of increase in interest rates by the federal reserve and also the magnitude of the increase has broadly undermined the great dollar rally in the past month. Also other central banks like RBA and Canadian central banks also refrained from further loosening of monetary policy.
GBPUSD
The Pound received a big boost when the Conservative party won the election with a majority, GBP has also been getting a boost through good economic indicators. The positives of the UK jobs figures are broad-based as the unemployment rate –measured by the ILO– dropped for the 3rd straight month to reaching 5.7%–its lowest since August 2008. Earnings rose by 2.1% y/y in the 3 months ending in December, reaching their highest level since Q2 2013, while earnings excluding bonuses slipped to 1.7% from 1.9%, meaning that pay growth ex-bonuses after inflation grew at the highest level in nearly 6 years. Finally, jobless count fell by 38,600, well above expectations of a 25,000 decline and the largest drop since October 2013. Pound also has been boosted by the release of the BoE's MPC minutes, which revealed that inflation could rise sharply once the oil effects have abated, while 2 members indicated a rate hike may still be needed in 2015.
The economic indicators suggest that Pound is a good alternative to US dollar because it backed by a major central bank which is expected to raise rates this year, also the Euro zone uncertainty would help to boost the pound further. There is also and expectation that UK inflation begin to stabilise before US as the pound has fell 10% against dollar and that will affect the inflation in the UK. From technical point of view from the chart below it can be concluded that Pound hit the bottom of a five year range and has strongly lifted to the top, this particularly indicates that we will see a strong recovery of pound against US dollar.
It can be concluded that GBPUSD's road to 1.600 and above appears bolstered by the above dynamics and is well underway. Therefore the bias is that to be long pound.
