The Federal Reserve this week was a bit more hawkish by keeping interest rates steady at 5.00-5.25 but raising their projected terminal rate by 50 basis points in the Dot Plot. The FOMC decided to take a pause in this meeting to gather additional economic data before deciding on a possible interest rate hike in July. Their caution may be justified by the weaker details in the latest NFP report, the ISM Services PMI report, and the CPI report, which showed a sticky and high core inflation though.
During the press conference, Fed Chair Powell mentioned that the July meeting is “live” but didn’t want to make a commitment in advance. When the Dot Plot was released, the market initially responded with a quick bid in the US Dollar, but it returned to its original levels once Powell's press conference began. Overall, this indicates that the Federal Reserve is prepared to take further action to control inflation, but their decisions will depend on the incoming economic data. Yesterday, the number of US Jobless Claims once again missed expectations by a significant margin, which could be another indication of a weakening labour market.
The BoE is on track to keep raising interest rates given the recent very hot employment report that showed a worryingly fast increase in wage growth. Given the Fed’s pause and the weaker data, this created a policy divergence between the Fed and the BoE, ultimately favouring the pound.
GBPUSD Technical Analysis – Daily Timeframe
On the daily chart, we can see that as soon as the GBPUSD broke out of the range, it took off helped by the strong UK employment report, the Fed pause and the miss in Jobless Claims. The price is now a bit overstretched though as we can see by the price distance from the blue 8 moving average. Generally, we can see some consolidation or a pullback to bring it back into equilibrium before the next move. Of note, the divergence with the MACD increases by the week and we could see some big moves once we get a catalyst.
GBPUSD Technical Analysis – 4 hour Timeframe
On the 4 hour chart, we can see that there’s pretty much nothing that the buyers or sellers can use to enter the market at these levels. In fact, from a risk management perspective, the buyers should wait for a pullback into the 1.2680 support where we can also find the 38.2% Fibonacci retracement level and the red 21 moving average. This would be a good level to lean on and would give a better risk to reward setup. The sellers, on the other hand, should wait for a break below the trendline before piling in and extend the fall into the 1.2444 level.
GBPUSD Technical Analysis – 1 hour Timeframe
On the 1 hour chart, we can see that more aggressive sellers may even try to pile in once the price breaks below the minor swing low at 1.2767 to target the 1.2680 support. We are likely to find strong buyers there, all else being equal.
Today, the market will pay close attention to the University of Michigan consumer sentiment report. Last time, the market reacted strongly to this report because long-term inflation expectations experienced a significant increase, going up from 3.0% to 3.2%. However, the number was later revised to 3.1%. Therefore, if we witness another increase in long-term inflation expectations, it's expected that the dollar will rise. Conversely, if the data falls short of forecasts, the dollar is likely to decline.
