Pound-to-Dollar Breaking Above 50-day EMA
- Written by: Gary Howes
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Pound sterling's year-end rally against the dollar gathers steam.
The pound to dollar exchange rate (GBP/USD) rises 0.70% today to hit its highest level since October at 1.3308.
The rally takes GBP/USD through the 50-day exponential moving average (EMA), which has proven to be a source of resistance in November, blocking the pound's route higher.
Sterling has been rising against the dollar since early November, but up until now, we've viewed the gains as a relief-style bounce, reinforced by the inability to crack the 50-day.
But a close above the 50-day EMA resistance level would confirm a more enduring recovery is perhaps underway, which opens the door for an eventual return to the 1.37 highs of mid-year at some point in Q1 of 2026.
Above: GBP/USD rises through the 50-day EMA resistance level.
Gains for sterling are widespread, suggesting that the risk premium associated with the budget, now in the rear-view mirror, is starting to unwind, allowing the currency to catch up with fairer valuations.
"Our high frequency fair value model finds GBP as cheap owing to fiscal risk premia linked to the budget, which we expect to evaporate over the coming weeks," says a note from TD Securities.
"The weeks of policy leaks frayed plenty of market nerves. The result of that was positioning skewed to managing downside risks for GBP. As unknowns become knowns that automatically generates relief, and some squaring of more apocalyptic type trades," says Nicholas Kennedy, FX strategist at Lloyds Bank.
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However, it's the U.S. dollar side of the GBP/USD that is the overwhelming driving force.
The world's most liquid and important currency has started to lose value during November as more official U.S. data is released, showing an economy that continues to see softening employment trends.
At the same time, the odds of Kevin Hassett replacing Jerome Powell as Federal Reserve Chair in 2026 have shot through the roof over the past week.
The data and the ordination of Hassett signal falling interest rates in the U.S. over the coming weeks and months, which is acting to weigh on the dollar.
Seasonals are also against the Greenback: "The month of December has historically been associated with notable USD selling across the board," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
So there are a few decent headwinds blowing against the dollar, and this is lifting the GBP/USD exchange rate just as some of that budget-related risk premium eases.
The outlook is constructive into year-end.
