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GBP/USD Up, Below Recent Highs As Markets Look To Fed

GBP/USD Up, Below Recent Highs As Markets Look To Fed

David Cottle, Analyst


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GBP/USD Prices, Analysis, and Charts

GBP/USD gained in European trade

• The week offers plentiful central bank policy decisions, with the Fed out front

• One BoE rate setter warned higher rates can’t be ruled out on Monday

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The British Pound made gains on the United States Dollar on Monday as a week packed with central-bank interest-rate decisions kicked off.

We’ll hear from the European Central Bank and the Bank of Japan but, of course, the US Federal Reserve’s call will be the most important. That’s due on Wednesday with markets betting we’re going to see the first pause in rate hikes in eleven meetings of the Federal Open Market Committee.

Even if these bets are proved correct it will still be unlikely that we’ve seen the end of higher rates Stateside, as inflation remains well above target. Still, the Fed has done better than other central banks in calming prices and may well feel fully justified in pausing. It has certainly been far more successful so far than the Bank of England, and the thesis that UK borrowing costs will still need to go materially higher continues to support Sterling.

Consumer price inflation in the United Kingdom decelerated quite markedly in April, according to official figures released at the end of last month. However, it was close to 9%, against a target of 2%, and food price increases are still rampant, running at 45-year highs.

GBP/USD has risen to its highest point since May 11 on Monday morning, perhaps in response to an article in the Scotsman newspaper by Bank of England rate-setter Jonathan Haskell in which he wrote that further interest rate rises cannot be ruled out and that it's important to try and stop inflation from becoming embedded in the economy.

There’s a bit of event risk for the Pound away from central banks and inflation this week, with official figures on growth and employment due. The economy has managed to defy some of the gloomier forecasts made at the start of this year with both growth and job creation more resilient than feared. However, should they remain so, it will likely be thought even clearer that borrowing costs will have to rise again.

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GBP/USD Technical Analysis

Chart Compiled Using TradingView

GBP/USD has managed to overcome for now a fall below its uptrend line from September 2022, with May 24’s close below it not obviously presaging deeper falls. Indeed the pair has risen quite sharply since then, with bulls focused on the psychologically important 1.2600 area ahead of May’s highs around 1.2679.

The delivery of that expected pause in US interest-rate rises could see the pair rise strongly, possibly back up to those levels. The trendline now offers support quite close to the current market at 1.2534. Below that, support will come in at 1.2477. That’s the first Fibonacci retracement of the rise up from the lows of March to the peaks of May.

There’s a clear upward pattern of higher lows which has been in place on the daily chart with very few breaks since May 26, and that suggests emerging trendline support at 1.2466.

Sentiment toward the pair is mixed according to IG’s own data. This suggests that investors feel the Pound may not have much more to give in the near term and that last month’s highs may not face a near-term challenge. There may be an understandable reluctance to place aggressive bets so close to this week’s major event risks.

--By David Cottle for DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.