Basic overview
The US dollar has weakened across the board recently due to a more dovish than expected FOMC decision last week as the Fed decided to signal a further tapering of the QT period starting in June and Fed Chairman Powell repeatedly rejected expectations of a rate hike. Furthermore, data released on Friday showed that the Federal Reserve may keep interest rates higher for longer as job and wage growth declines. The US dollar has erased some of its losses this week, but overall we have range-bound price action in the currency market as we await the US CPI report next week.
On the other hand, the British pound rose mainly due to the weakness of the US dollar and risk sentiment. Tomorrow we await the Bank of England's decision on interest rates, as the central bank is expected to keep interest rates unchanged at 5.25%. The latest inflation report showed headline and core figures to moderate further while labor market data showed an increase in unemployment and job losses as wage growth figures rose. In the last meeting, the vote division changed with the more hardline members joining the confirmation camp and Dhingra remaining the usual maverick who votes for the cut. The market expects the first rate cut to take place in September and it is unlikely that we will see the Bank of England make major changes in the next decision.
Technical Analysis of GBPUSD – Daily Time Frame
British pound against the dollar daily
On the daily chart, we can see that GBPUSD rose above the trend line after the US Non-Farm Payrolls report was released, but was eventually rejected from the 1.26 handle and all the gains faded away leaving behind a potential fake. This is generally a reversal pattern, although it would be better to pair it with a trigger. For now, we are in a state of limbo as the market has priced in significant interest rate cuts and has remained fairly stable around current pricing. The pair now appears to be mostly driven by risk sentiment.
Technical analysis of GBPUSD – 1 hour time frame
GBP/USD 1 hour
On the hourly chart, we can see that from a risk management perspective, sellers will have a better risk to reward setup around the previous support which has now turned into resistance around the 1.2530 level. In fact, if the price breaks above the resistance level and trend line, the bearish setup will be technically invalidated and buyers will likely pile in with more conviction to place a position for a rally to new highs.
Upcoming stimuli
Tomorrow we await the Bank of England's monetary policy decision and US unemployment claims numbers. On Friday, we'll have a consumer survey from the University of Michigan. We are unlikely to see major changes in market expectations, so price action may remain temporary ahead of the US CPI release next week.