GBP/USD: 3 reasons for the rally to continue

The GBP/USD pair rose above 1.40 this year, then trended lower in the second half of the year. But despite the persistent weakness seen in recent months, cable, as it is also known, looks bullish ahead of the new trading year.

2021 was the year of the US dollar. Despite accommodative financial conditions in the US, investors bought the world's reserve currency due to inflationary fears and projections of faster monetary tightening.

Now that these projections are coming true, the dollar's rally may be reversed. The Fed has announced faster tapering and suggested that at least two rate hikes are on the way in 2022. But market participants are still trading with a forward-looking view, and despite the Fed's hawkish turn, US financial conditions remain close to their lowest on record.

As a result, the GBP/USD rebound could be just the beginning of a new downtrend for the greenback. Here are three technical reasons that support a higher GBP/USD exchange rate in 2022: a bullish flag, a bearish wedge and a pivot level that attracts price.

The bullish flag indicates a rise
As the name suggests, a bullish flag indicates higher market levels. Conservative traders may want to wait for the market to move past the bullish edge of the flag before going long with a stop on the opposite edge and targeting a move above 1.40.

The descending wedge pattern has recently ended
From October onwards, a descending wedge pattern appeared inside the bullish flag. The pattern suggests a reversal and on top of that the market found dynamic support at the lower edge of the flag. Now that price has broken through the upper trendline of the descending wedge pattern, aggressive traders may want to go long with a stop at the 2021 low and target a move above $1.40.

The 1.40 pivot level attracts price action
1.40 is a critical level for the GBP/USD pair. Firstly, this is the area where the currency pair was rejected prior to the formation of the bullish flag. Secondly, a double top has formed here, suggesting strong resistance ahead.

However, as a round number, it still attracts price action. Coupled with the two previous bullish patterns mentioned above, 1.40 could serve as a pivot level. A break above 1.35 could be exactly what the bulls need before 1.40.