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GBP/USD Pulls Back as Markets Look for Next Fed Rate Steer

GBP/USD Pulls Back as Markets Look for Next Fed Rate Steer

David Cottle, Analyst


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GBP/USD Price, Charts and Analysis:

  • GBP/USD gives back some ground as markets look to the Fed’s meeting minutes.
  • However, Sterling remains well supported close to recent significant highs.
  • Speculative positions remain long to a remarkable extent.
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The British Pound edged lower against the United States Dollar in Wednesday’s Asian and European sessions as the market looked towards its next steer on Federal Reserve monetary policy, coming up later in the day, at 1800 GMT.

The Fed will release minutes from its June 14 meeting, at which rates were left unchanged for the first time in over a year. However, the US central bank left markets with the clear impression that still-higher rates were merely postponed, pending assessment of previous hikes’ effects, rather than taken off the table.

Indeed, based on Fed commentary, and sticky inflation, the market is looking for two more quarter-percentage-point rate increases this year. The first one is widely expected as soon as this month (the next policy meeting will wrap up on July 26).

Markets will of course be on watch for the extent to which the Fed minutes confirm their suspicions. Given the weakness seen in US economic data this month already, there will in any case be some fear that the economy won’t be able to take higher rates without sustaining more significant economic damage. This may mean that bullish bets on the Dollar are pared back but, given that just about every developed economy faces the same challenges now.

The United Kingdom faces its own prolonged battle with inflation, of which the country has caught one of the worst and most stubborn cases. The idea that the Bank of England still has much work to do to bring prices to heel saw Sterling rise in mid-June to highs not seen against the US Dollar since April 21 last year.

The Bank of England has already primed markets to expect local interest rates to remain higher for longer.

While some of those sterling-bullish bets have been pared given the UK’s clear economic headwinds, the currency remains quite close to those peaks even allowing for widespread belief that the Dollar could soon be getting more monetary support of its own. Unless the Fed provides some major hawkish impetus in the minutes, the Pound looks likely to retain support.

Speculative investors reportedly are at their most bullish on the British currency since before the Brexit vote back in 2016. The number of ‘long’ contracts (those betting on a rise) rose by 5,000 in the last week of June according to data from the Commodity Futures Trading Commission.

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GBP/USD Technical Analysis

GBPUSD Daily Chart

Chart Compiled UsingTradingView

GBP/USD remains well within the broad uptrend channel established back in March, as an extension of the run of gains seen since late September last year. The pair has already bounced once at the first Fibonacci retracement of the rise up from those lows to the peak of June 19.

That comes in at 1.22715, with channel support likely in place above it at 1.24337.

Sterling bulls will need to regain that June peak of 1.28613 and hold the market there if they’re going to close the gap between that level and the next major upside hurdle. That’s the trading range set between March 3 and April 22 last year. The lower bound of that range comes in at 1.29468, not far above the current market.

--By David Cottle for DailyFX

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