Pound Sterling breaks to new 2023 highs as it changes the head on notes and coins

• Pound Sterling vs US Dollar rises to mid 1.26s as US Dollar weakens and BoE meeting appears on radar. 
• The Pound benefits from monetary policy divergence with the US Dollar as elevated inflation suggests more hikes to come in the UK.
• Trend remains bullish suggesting higher highs to come as GBP/USD continues rising.

The Pound Sterling (GBP), the oldest currency in the world, rises versus the US Dollar (USD)  on Monday, as the island nation has crowned a new head for its notes and coins in King Charles III.

The Pound Sterling is benefitting from a perceived monetary policy divergence with the US Dollar. Interest rates in the US may have peaked unlike in the UK where persistently high inflation coupled with robust data continues to suggest the Bank of England (BoE) will need to do more to get inflation under control. Since global investors are always looking to park their money where it can earn the highest return, this favors GBP. 

From a technical perspective, GBP/USD continues to make new highs in a broadly bullish long-term uptrend. Given the old adage that “the trend is your friend” this advantages long over short holders. 

GBP/USD market movers

• The Pound Sterling is profiting from outflows from the US Dollar as the US Federal Reserve (Fed) is seen as having probably reached peak interest rates in the current hiking cycle, whereas strong inflationary tendencies in the UK suggest higher rates to come, including 25 bps at the Bank of England (BoE) meeting on Thursday. 
• With data continuing to show UK inflation above 10% for the seventh consecutive month and robust PMI data, as well as a recent uptick in house prices, inflationary forces in the UK do not look like they are about to ebb away. 
• Next Thursday’s Bank of England (BoE) monetary policy meeting may reveal the BoE’s intent regarding future policy trajectory and could cause volatility in Pound Sterling pairs. If the BoE is particularly hawkish it will highlight this divergence with the Fed and result in increased flows to Pound Sterling. 
• The poor performance of the Conservative government in local elections suggests a high chance the party will lose the next general election. The Pound Sterling declined to historic lows under the stewardship of the previous Prime Minister Lizz Truss and her Chancellor Kwazi Kwarteng, which caused a loss of faith in the Conservative party as a safe pair of hands when it comes to the economy.
• UK S&P Global Services PMI out on Thursday showed a higher-than-expected result of 55.9 versus the 54.9 no-change forecast. Construction PMI out on Friday also beat expectations, coming out at 51.1 versus the 50.7 of the previous month. This suggests continued inflationary pressures.
• The US Dollar continues to suffer from banking crisis fears in the US after the shares of two more regional banks, PacWest and Western Alliance, fell 50% and 40% respectively last week, on fears they were next to topple. 
• The US Dollar, nevertheless, gained a short-lived boost after the release of Nonfarm Payrolls on Friday which showed a higher-than-expected rise of 253K versus 179K forecast. Above-forecast gains in Average Hourly Earnings of 4.4% and a fall in the Unemployment Rate to 3.4% further supported the Greenback. 
• The release of US Consumer Price Index (CPI) data for April on Wednesday, May 10, at 12:30 GMT, will provide further data for the Federal Reserve to base future policy decisions. Currently expectations are for CPI to gain by 0.4% MoM and 5% YoY. Core CPI is forecast to rise by 0.4% MoM and 5.5% YoY, and is the metric that has the greater impact because it takes out volatile food and fuel components from the calculation. 
• The Release of the Fed’s bank Loan Officer Survey for Q1 on Monday at 18:00 GMT could move the US Dollar as it will shine a light on credit conditions in the US banking sector. If a substantial shrinking of credit is observed then it could have a negative impact on the US Dollar (GBP/USD positive). 

GBP/USD technical analysis: Uptrend extends

GBP/USD continues making new highs, most to 1.2668, extending the established uptrend that began at the September 2022 lows. The overall trend remains bullish, favoring Pound Sterling longs over shorts. 

GBP/USD: Daily Chart

The recent decisive break above the 1.2593 April 28 highs opens the door to further gains to come. The GBP/USD completed three consecutive bullish green days in a row when it broke through the April resistance highs, indicating a higher chance price will hold above the level and continue rising higher. 

To the upside, key resistance levels lie close to the current market level at the May 2022 highs at 1.2665, then at the 100-week Simple Moving Average (SMA) situated at 1.2713, and finally at the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1.2758. All provide potential upside targets for the pair. Each level will need to be decisively breached to open the door to further upside. 

A decisive break is characterized by either a strong green daily bar that breaks above the key resistance level in question, and closes near the day’s highs. Or alternatively, three consecutive green bars that break above the resistance level. Such insignia provide confirmation that the break is not a ‘false break’ or bull trap. 

The Relative Strength Index (RSI) remains below the overbought level at 70 but is creeping higher in line with price, reaching the upper 60s at the time of writing. Monday’s new higher highs in price were accompanied by similar higher highs in RSI indicating there is no bearish divergence. This is a mildly supportive sign for GBP/USD and may be indicative of further gains to come.