After the extraordinary performance of the British pound over the last days, UK data due out Wednesday will be in focus with bets on the GBP/USD reaching one-year highs.
Markets' appetite for sterling ahead of the announcements has increased considerably with the EUR/GBP falling to one-year lows and the GBP/USD rallying for third straight day.
The UK unemployment report is expected to show the jobless rate fell to 7.2% n November from 7.4% in October. According to analysts at Danske Bank, the UK economy has been growing strongly over the past year and unemployment is falling at the fastest pace in a decade.
They also believe that the minutes from the latest Monetary Policy Committee (MPC) meeting at the Bank of England "will be scrutinised for clues about what factors will determine the first hike once the unemployment rate has fallen below the threshold of 7%".
"With unemployment falling at a much faster pace than expected in the November Inflation Report, the big question is whether the MPC will lower its threshold or change its communication towards other measures. We expect it to continue signaling that it is too early for rate hikes and we will monitor any discussions in the minutes closely," they said.
This scenario is expected to trigger a rally in the sterling that could drive the GBP/USD to break near-term resistances at 1.6516 ahead of 1.6603 - the January high. According to Karen Jones, technical analyst at Commerzbank, the currency pair "has seen an erosion of its near-term resistance line and this suggests unfinished business on the upside".
"Directly above here lies the 1.6635 200 month ma and we suspect that the market will struggle to make much impression above 1.6600/35," she said.
César Nuez, technical analyst at fxmania, believes that a bullish signal is needed to confirm the start of a new rally. "This signal would be produced with a close above 1.66, which in theory should trigger a rally equivalent to the size of width of the range. This means that the GBP/USD could reach 1.70," he said.
EUR/GBP pressured to the downside
EUR/GBP has maintained downside pressure and has charted a new one-year low. Jones believes that it remains under pressure and she looks for the market to extend its losses to 0.8200 psychological support and then 0.8160, the 61.8% retracement of the move from 2012 en route to 0.8000/0.7983.
"However the daily RSI has yet to confirm the new low and we will tighten up stops on shorts considerably," she alerted.
Analysts at MIG Bank pointed out that the long-term bias of the pair remains negative: "We favour further gradual weakness towards 0.8160 (61.8% retracement of the 2012-2013 rise)," they said.
View GBP/USD technical analysis in video