GBP/USD Forecast: Bullish potential intact, UK Retail Sales/PMIs awaited

• GBP/USD caught some fresh bids and rallied to nearly three-year tops on Thursday.
• The upbeat market mood undermined the safe-haven USD and remained supportive.
• Indications that lockdown in the UK will be extended prompted some selling on Friday.
• Investors now look forward to UK Retail Sales and PMI prints for some trading impetus.

A combination of factors assisted the GBP/USD pair to gain strong positive traction on Thursday and rally to the highest level since May 2018, around mid-1.3700s. The prevalent risk-on environment continued weighing on the safe-haven US dollar, while the British pound benefitted from the rapid vaccination campaign and a gradual decrease in COVID-19 cases in the UK. The global risk sentiment remained well supported the optimism over COVID-19 vaccine rollouts and expectations for a massive US fiscal stimulus, which lifted hopes for a strong economic recovery.

The USD remained depressed and failed to gain any respite following the release of better-than-expected US macro data. In fact, the US Initial Weekly Jobless Claims fell to 900K last week as against 910K expected. Separately, the Philly Fed Manufacturing Index also surpassed consensus estimates and jumped to 26.5 from 9.1 previous. Adding to this, the US housing market data – Building Permits and Housing Starts – also came in better than market expectations, albeit did little to impress the USD bulls or hinder the pair's intraday positive momentum.

Meanwhile, a modest pickup in the US Treasury bond yields extended some support to the greenback. Apart from this, indications that lockdown restrictions will be extended in the UK kept a lid on any further gains for the major, rather prompted some selling during the Asian session on Friday. The pair, for now, seems to have snapped three consecutive days of the winning streak as market participants now look forward to the UK monthly Retail Sales figures for a fresh impetus. The UK economic docket also features the release of the flash PMI prints for January.

The gauge for the manufacturing sector is expected to drop to 54 during the reported month from 57.5 previous. Meanwhile, activity in the crucial services industry is expected to drop further into the contraction territory, which could fuel worries about the UK economic growth at the start of 2021 and prove negative for the British pound. Apart from this, developments surrounding the coronavirus saga will also remain in focus for the GBP traders. This, along with the broader market risk sentiment, might influence the USD price dynamics and produce some trading opportunities.

Short-term technical outlook

From a technical perspective, the overnight sustained move beyond the 1.3700 mark favours bullish traders and supports prospects for additional gains. The positive outlook is further reinforced by the fact that the recent strong move up over the past four months or so has been along an upwards sloping channel. This points to a well-established near-term bullish trend and hence, any meaningful pullback might still be seen as a buying opportunity.

From current levels, the 1.3665 horizontal level is likely to protect the immediate downside. This is followed by support near the 1.3620 region and the 1.3600 round-figure mark. A sustained break below might prompt some technical selling and turn the pair vulnerable to correct further towards testing the key 1.3500 psychological mark. Any further decline is more likely to find decent support and remain limited near the trend-channel support, currently around mid-1.3400s.

On the flip side, the overnight swing highs, near the 1.3745 region, now seems to act as immediate resistance. Some follow-through buying has the potential to assist bulls to aim to reclaim the 1.3800 round-figure mark. The momentum could get extended further and has the potential to push the pair towards the top boundary of the mentioned channel. The mentioned barrier is pegged near the 1.3835-40 region, which if cleared decisively will be seen as a fresh trigger for bullish traders.