Sterling was the best-performing major currency on Wednesday, pushing GBP/USD to its highest level in nine weeks. A UK GDP beat, optimism over the country’s fiscal outlook and a second day of dollar weakness drove the pair to a decisive close above 1.3500.
The pound led every major currency on Wednesday, and GBP/USD reached its highest level in nine weeks. Investing.com attributes the move to a weaker US dollar and growing confidence in the UK’s fiscal outlook.
What lifted the pound
The immediate catalyst was UK output. The UK GDP Estimate rose 0.1% month-on-month, beating expectations of 0.0% and recovering from the prior month’s -0.1% contraction, which Investing.com reads as a sign the economy is starting to recover.
A separate ONS release painted a more mixed picture. DailyForex reports the economy expanded 1.3% in May, short of the 1.4% expected, with industrial production down 0.5% and construction output down 0.8% while manufacturing edged up 0.1%. Even so, the pair held its ground.
Politics added support. Investing.com notes that incoming Prime Minister Andy Burnham is considering Shabana Mahmood for Finance Minister, a candidate markets view as fiscally disciplined, which reduces the chance of Ed Miliband taking the role. DailyForex adds that Burnham is expected to become prime minister next week.
Dollar weakness on cooler inflation
The other half of the trade is the greenback. The US dollar weakened for a second session, with the US Dollar Index approaching the 100 level. Behind the move sits softer US inflation. DailyForex reports that the cooler consumer and producer prices eased pressure on the Federal Reserve to hike this month.
Where the pair goes next
Technically, GBP/USD closed decisively above the psychological 1.3500 level, confirming a breakout above resistance that had capped the upside. Investing.com puts the next targets at 1.36000 and the May high of 1.36585, while a pullback toward the 1.35099-1.34611 zone remains possible after the recent 146-pip rally.
Traders now look to the US retail sales report the Commerce Department is set to release, which could set the dollar’s next move.
Sources: Investing.com, DailyForex
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