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

GBP/USD rates, analysis and charts

• GBP/USD gained ground in European trade

• The week offers a lot of central bank policy decisions, with the Fed at the forefront

• An interest rate setter at the Bank of England warned that a rise in interest rates cannot be ruled out on Monday

The British pound gained against the US dollar on Monday, kicking off a busy week with central bank interest rate decisions.

We will hear from the ECB and the Bank of Japan, but of course, the US Federal Reserve call will be the most important. This is due on Wednesday with markets betting that we will see the first pause in rate hikes at eleven FOMC meetings.

Even if these bets prove correct, it remains unlikely that we will see the end of higher rates in the US, where inflation remains well above target. However, the Fed has done better than other central banks in cooling rates, and may feel fully justified to pause. It has certainly been more successful so far than the Bank of England, and the thesis that UK borrowing costs will still need to rise materially continues to support sterling.

UK consumer price inflation slowed significantly in April, according to official figures released at the end of last month. However, it came close to 9%, against a target of 2%, and food price increases remain rampant, at 45-year highs.

GBP/USD rose to its highest point since May 11 on Monday morning, possibly in response to an article in The Scotsman newspaper by Jonathan Haskell, interest rate preparer at the Bank of England, writing that more could not be ruled out. Interest rate hikes and that it is important to try to prevent inflation from becoming an integral part of the economy.

There is little event risk to the pound aside from central banks and inflation this week, with official figures on growth and employment being released. The economy has managed to defy some of the bleaker forecasts issued at the start of this year, with growth and job creation more resilient than feared. However, if they remain so, he will likely think that borrowing costs will obviously have to go up again.

Technical analysis of the British pound / US dollar

Chart compiled using TradingView

GBP/USD has managed for the time being to overcome a decline below the ascending trend line from September 2022, with a May 24 closing below that clearly does not portend deeper declines. Indeed, the pair has risen sharply since then, with the bulls focusing on the psychologically important 1.2600 area ahead of May highs around 1.2679.

Handing over this expected pause in rising US interest rates could send the pair higher, possibly back to those levels. The trend line is now providing support very close to the current market at 1.2534. Below that, support will come in at 1.2477. This is the first Fibonacci retracement from the March lows to the May highs.

There is a clear bullish pattern of higher lows placed on the daily chart with very few breakouts since May 26th, this indicates an emerging trend line support at 1.2466.

Sentiment towards the pair is mixed according to IG’s own data. This suggests that investors feel that the pound may not have much to offer in the near term and that the high levels it hit last month may not be challenged in the near term. There may be an understandable reluctance to place aggressive bets so close to the stakes of this week’s major events.

– By David Cottle for DailyFX